Note: A potential for zero. FAT has been on our watchlist over the past year. The market capitalization is less than a billion, with a short interest of nearly 10% on 17,117 volume of shares outstanding. A deep-dive investigative summary on FAT. This report was published on August 12, 2022. As of this writing, the stock was down 7%. Short thesis and brief analysis snippet for our paid subscribers.
FAT Facts to consider:
A giant roll-up run by Andrew Alan Wiederhorn
Irresponsible management: CEO investigated for financial fraud
Debt trap
Franchise “trap”
A well-crafted Ponzi scheme (of sorts) - acquiring more companies and thereby increasing royalty revenues (non-organic)
What can be said about FAT Brands and its franchise network?
A great ambiance with lovely food doesn’t make a franchise work.
Over the past 18 months, FAT purchased nine restaurant chains in five acquisitions for nearly a billion dollars.
According to Law360, the problems go back further to February 11, when a Delaware Chancery court kept alive a lawsuit accusing Andy Wiederhorn, FAT's largest shareholder, and three directors of "looting" the company by shifting around $50 million in debt to "already weak" FAT Brands through "insider deals and a merger.1
FAT is infested with internal fraud and lawsuits, and it is not new.
Source: FAT Brands shareholder presentation
A FAT Franchise Scheme
A franchise company makes its money by selling the dream of self-employment and owning your own business. The franchise then pays a monthly fee, usually a minimum and a percentage of sales for joint advertising, marketing, and the franchiser’s profit. The franchise will also likely be required to purchase supplies from the franchisor. So a franchise company is not selling to the retail but to those who want a successful business.
HISTORY
Andrew Wiederhorn is the chairman and chief executive of Fatburger Inc., a fast-food restaurant chain based in Beverly Hills. The first Fatburger opened on Western Avenue in Los Angeles in 1947 and gained notoriety when rappers Ice Cube, Tupac Shakur, and the Notorious BIG all mentioned the restaurant in songs. Since 2003, Fatburger has been owned by Fog Cutter Capital Group Inc., a Santa Monica investment company of which Wiederhorn is also chairman and CEO.2
Fraud, Money laundering, and Jail time
After one of Wiederhorn’s business associates in Portland was arrested under a 22-count federal indictment, including charges of mail fraud, money laundering, and witness tampering, authorities began investigating Wiederhorn too. In 2004, he pleaded guilty to charges of paying an illegal gratuity to his associate and filing a false tax return. He spent 15 months in prison in Sheridan, Ore.
Case: June 05, 2005
“US District Court, District of Oregon (Portland (3)), CRIMINAL DOCKET FOR CASE #: 3:04−cr−00238−BR where Andrew Wiederhorn was charged with Payment of Gratuities and Filing False Tax Return”
Outcome
Counts 1 and 2: IMPRISONMENT = 18 MONTHS; SUPERVISED RELEASE = NONE; FINE = $25,000; RESTITUTION = $2,000,000.00 (to Payee Thomas Lennon, Receiver, Capital Consultants, La Mesa, California); FEE ASSESSMENT = $100 ON EACH COUNT FOR A TOTAL OF $200; Defendant to voluntarily surrender on 8/2/04 before 2:00 pm to the institution designated by the Bureau of Prisons; by Judge Anna J. Brown; signed on 11/30/04. (kw, ) (Entered: 11/30/2004)”3
A good summary of the case and what happened in more detail can be found in Senate Hearing 109-144 June 05, 2005.4
The Management
The board of his company, called FogCutter Capital and the owner of Fatburger, agreed to pay him $4.6 million, which more than covered his $2 million government fine and his salary while he was in jail, violating federal rules and resulting in his company being delisted from Nasdaq.5
The CEO’s incarceration was called a “leave of absence,” where he retained his seat on the board of directors while in prison, to which Wiederhorn received a $2 million leaves of absence bonus, the same amount he was ordered to pay in restitution for his felony charges.
Meanwhile, in 2009, Fatburger subsidiaries were given notice by their financier, General Electric Capital Business Asset Funding Corporation, for default and demand of payment for a $3.85 million loan. As a result, Fatburger could not make payments under the loan, which caused several restaurants in the chain to file for bankruptcy.
Delisting
Following the bankruptcy filings, the NASDAQ delisted FCCG’s common stock for failure to file financial reports with the Securities Exchange Commission promptly. Because of the delisting, FCCG’s eight million shares became worthless.6
FAT 2.0 and IPO Drama
Fog Cutter relocated to Santa Monica in 2010 to reconnect with Fatburger’s roots, Wiederhorn said. In addition, the company is aggressively expanding its locations and offerings. Fatburger had 40 stores in 2003. By the end of 2012, there were 150 Fatburgers in 27 countries.
FAT Brands owned two franchised casual dining restaurants at the time of the IPO, including Fatburger and Buffalo’s Cafe/Buffalo’s Express. FAT Brands also intended to complete an acquisition of the Ponderosa and Bonanza Steakhouses with the consummation of the IPO.
After FAT Brands was formed, the plan was to sell two million shares of company stock, offering $12 per share and raising $24 million in gross proceeds, a cash injection that would still leave FCCG’s ownership intact with 80 percent of the total voting power in the company. FAT Brand’s goal was to use the proceeds to purchase the Ponderosa and Bonanza steakhouses while using the remainder to pay FCCG’s debt.
FAT Brand’s board of directors then commenced a multi-city roadshow to market the stock to the investing public. According to the complaint, the roadshow helped secure the two million shares under the IPO the company was seeking to sell.
FAT Brands later held a webinar showcasing a video to show that FCCG would continue to hold the majority share at 80 percent. Still, they omitted that the Wiederhorn family owned the majority of the shares at 75 percent, making a single family the majority shareholders and not FCCG as indicated. In addition, according to the complaint, FAT Brands failed to disclose a planned merger from FCCG into FAT Brands, which would effectively allow the Wiederhorn family to take FCCG public without undertaking a formal IPO process.
During the webinar, FAT Brands also failed to mention that the free cash flow was insufficient to cover the 48-cent per share dividends offered by the company.
Wiederhorn spoke highly of FAT Brands’ margins, claiming they were “very, very strong," while Fatburger and the newly acquired steakhouses showed a downturn in 2017 profits at the time of the IPO.
The IPO was initially successful for the company. However, “the price of FAT Brands common stock later plummeted as the market learned the truth about FAT Brands’ business metrics and financial prospects at the time of its IPO.7
The Plunge
Shareholders launched a securities class action against FAT Brands Inc., claiming the company misrepresented the financial strength of its restaurants in the lead-up to an initial public stock offering.8
Lead plaintiff Eric Rojany filed the complaint in the Superior Court of California, naming Fat Brands, CEO Andrew Wiederhorn, Fog Cutter Capital Group, and others as defendants.
In 2011, FCCG acquired the restaurant Fatburger, where Wiederhorn also served as the CEO of the restaurant chain.
Beware of FAT Leverage
Investors Beware:
A high level of debt on the balance sheet is a huge red flag for its investors. Especially considering FAT and its management’s past.
FAT is paying a self-liquidating dividend
The number of locations doesn’t indicate success.
FAT does not own or operate restaurant locations as a franchisor but derives revenue by charging franchise fees and ongoing royalties. Therefore, FAT has an asset-light business model which allows a strong gross profit margin while minimizing operating risks.
Debt Analysis
Andrew Wiederhorn leveraged using debt and seller-financed debt and went on an acquisition spree.