OTG EXP, Inc. OTG $16.00-$18.00 32.5 million shares Underwriters: Morgan
Stanley, Credit Suisse, Barclays, BMO Capital Markets Co-Managers: Keybanc Capital Markets,
Fifth Third Securities, Regions Securities LLC, Maxim Group Proposed trade date of 2/10 They are one of the
leading airport food and beverage operators in North America with more than 220
locations in 23 terminals across 10 airports.
OTG EXP,
Inc. OTG
Click here
to view the prospectus.
http://www.sec.gov/Archives/edgar/data/1656987/000156761916001742/s001076x7_s1a.htm
Company
Overview
OTG is a high-growth company that is transforming
the airport travel experience for millions of travelers every year. They combine world-class hospitality and
award-winning cuisine with innovative design and state-of-the-art technology
to provide what they call the “OTG Experience.” OTG’s proprietary restaurant
concepts are complemented by their signature tablet platform which was the
first, and remains the only one of its kind in their industry. OTG started in
1996 with a single restaurant location in the
OTG’s approach as an operator of its own proprietary
concepts is highly differentiated in the airport concessions industry. Over
the past 20 years, they have expanded their offerings from F&B to include
N&G and concession management services. They have become a one-stop
airport solutions provider with a demonstrated ability to design, develop,
operate and manage entire terminal concessions programs, which refers to
the programs where they either operate substantially all of the F&B
concessions or F&B and N&G concessions or have management authority
over the concession program or terminal, which is a key area of focus for them.
OTG’s customers are comprised of two distinct groups. The first group, which
they refer to as their business partners, includes airlines, airport operators
and concession program managers, and increasingly other commercial enterprises
seeking to leverage the impact of the OTG Experience. The second group consists
of the tens of millions of people each year that pass through the airports containing
OTG operations, as well as the employees and crewmembers of their airline and
airport partners.
Their passionate crewmembers deliver the OTG
Experience to their customers in some of the most frequently traveled
airports in North America, including Kennedy, LaGuardia, Newark, Philadelphia,
Reagan, Minneapolis-St. Paul and Toronto-Pearson through the following:
Inviting Hospitality. They seek to provide a personal touch and a
first-class experience for all travelers, not just those flying first class.
Now, everyone can enjoy concierge style service while waiting for their flight.
Through their interactive tablet programs, travelers can order everything
from gourmet sandwiches and salads, to sushi and steak accompanied by a fine
wine or a locally-brewed craft beer. Utilizing their “2U” service,
customers can also shop for electronics and travel accessories such as
headphones and neck pillows. One of their crewmembers will deliver their
meal and purchases right to their seat in one of their restaurants or even at
the gate. Travelers can also charge their personal devices at an array
of tabletop outlets and USB ports and use their tablets to surf the Internet,
play games, order personalized services or shop with their retail partners.
These services and conveniences reduce traveler anxiety and allow their
customers to have a more relaxing travel experience.
Authentic Dining Experiences. They own and operate restaurants inside of
airports, not airport restaurants. They create culturally inspired,
authentic food programs through relationships with renowned local, national and
international chefs, including Michelin-starred chefs, James Beard award
winners and Iron Chefs. They develop expansive menus and product selections
that are designed to appeal to a wide variety of travelers. They seek to source
the freshest ingredients locally using artisan purveyors and greenmarkets for their
“farm-to-terminal” model. As a result, their food and beverage concepts are
known for award-winning cuisine across a broad spectrum of styles and service
options, from food courts to full-service dining, to grab-and-go gourmet
markets. They primarily operate proprietary concepts such as their gourmet
burger concept Custom Burger (with meats sourced through Pat Lafrieda), their
pizza concept Tagliere, their coffee concept WorldBean and other examples that
include New England-inspired seafood shack Anglers, sandwiches at Interwich and
contemporary Japanese cuisine at Kombu. For those on the run, they have fresh
to-go food options at CIBO Express that can be picked up on the way to the
gate.
Thoughtful and Innovative Design. OTG reimagines the physical space of the airport
and works with some of the world’s leading design firms to plan and build
customer-centric, free flowing and modern facilities. OTG develops integrated
concession programs dedicated to enhancing not only the function, but also the
look and feel, of an airport terminal. They have changed traditional
gate-hold areas beset with tight and limited seating and services, into revenue
generating spaces containing comfortable restaurant, bar and lounge seating and
offering a variety of service and entertainment options. Additional design
innovations allow them to change the look, functionality and menu offerings of
a single location depending on the time of day, for example by changing from a
bakery cafe in the morning to an Italian-style deli in the afternoon. They work
closely with their airline and airport partners in all phases of a project from
conception and development to operations.
State-of-the-Art Technology. They are known as the company that put iPads in
airports, and their program is on track to be one of the largest
consumer-facing deployments of the iPad in the world. Their
state-of-the-art technology allows them to deliver enhanced customer
experiences that drive higher sales revenues. Their tablet program provides
more accurate ordering (in over 20 languages) and faster delivery and check-out
services. Their customers can conveniently order more products and services,
and they can serve more customers and process more transactions. In addition, their
recommendation engines seamlessly offer customized and personalized food and
beverage suggestions. Lastly, their tablet platform allows for the creation
of additional sources of revenue from advertising, marketing, gaming and
entertainment programs with other business partners including credit card
companies, car rental companies and online shopping sites.
The seamless integration of these elements defines
the OTG Experience, changing the “need” to get to the airport early to the
“want” to get to the airport early. They have deployed their focused business
model in a variety of settings, but it is always anchored by the personal touch
reflected in their core values of integrity, passion, quality, safety, caring,
fun and creativity. They have continued to learn and evolve around the needs
of their customers and partners and have grown significantly over the last
three years primarily by focusing on large projects involving the redevelopment
of entire terminal concession programs.
New Concession
Programs
IPO
Detail
This is the initial public offering of OTG
EXP, Inc. and no public market currently exists for its common stock. OTG EXP,
Inc. is offering 32,500,000 shares of common stock as described in the
prospectus. The company expects the initial public offering price of its common
stock to be between $16.00 and $18.00 per share. The company has applied to
list its common stock on the NASDAQ Global Market under the symbol “OTG.”
|
Class A common
stock offered by the company |
32,500,000
shares |
|
Class A common
stock to be outstanding immediately after this offering |
45,228,278
shares |
|
Class B common
stock to be outstanding immediately after this offering |
53,022,481 shares |
They
have two authorized classes of common stock: Class A and Class B. Holders of their
Class A common stock are entitled to one vote per share, and holders of their Class B common
stock are entitled to ten votes
per share, and all such holders will vote together as
a single class except as otherwise required by applicable law. Holders of their Class B common stock do not have any
right to receive dividends or distributions upon their liquidation or winding up. Immediately following this
offering, the holders of their Class A common stock will collectively own 100%
of the economic interests in OTG EXP, Inc. and have 7.9% of the voting power of
OTG EXP, Inc. The holders of their Class B common stock will have the remaining
92.1% of the voting power of OTG EXP, Inc.
Use of
Proceeds
They
estimate that the net proceeds to them from this offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by them, will be approximately $506.0 million. They intend to use $415.6
million (or $454.8 million if the underwriters exercise in full their option to
purchase additional shares of Class A common stock) of the net proceeds from
this offering to purchase newly-issued LLC Units from the LLC and $90.4 million
(or $129.5 million if the underwriters exercise in full their option to
purchase additional shares of Class A common stock) to purchase LLC Units from
an affiliate of Mr. Blatstein and to purchase LLC Units from, and make certain
payments to, certain of their other existing owners that will receive shares of
Class A common stock in exchange for LLC Units they would have otherwise
received in connection with this offering.
The
proceeds received by the LLC in connection with the sale of newly issued LLC
Units will be used together with proceeds from their New Term Loan Facility (i)
to repay approximately $100.0 million of indebtedness under their Existing Term
Loan and approximately $146.4 million of indebtedness under their Existing
Delayed Draw Term Loan each of which has a current interest rate of 8.75% per
annum and matures on December 11, 2017, and to pay related prepayment penalties
of approximately $2.5 million, (ii) to repay approximately $205.5 million
aggregate principal amount of outstanding notes, which have a current interest
rate of 17.0% and mature on June 11, 2018, and to pay related prepayment penalties
of approximately $46.1 million, and, if any proceeds remain, (iii) for working
capital and general corporate purposes, includes fees and expenses related to their
New Credit Facility.
Competition
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Exchange. |
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HHMSHost
Corp. (subsidiary of Autogrill SpA.) |
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SSP
Group PLC |
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SSPG |
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LON |
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. Hudson Group (subsidiary of Dufry AG) |
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DUFN |
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SWX |
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Westfield
Corp. |
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WFD |
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ASX |
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Marketplace
Development |
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Private |
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AIRMALL
USA, Inc.( subsidiary of Fraport AG.) |
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FRA |
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ETR |
Market
OTG operates
in the growing airport concession market, which comprises F&B, N&G,
specialty retail and commercial services. The two primary metrics that drive
growth in the airport concession industry are enplanements and revenue per
enplanement (“RPE”), and airport concession companies like OTG have benefited
from long-term growth in these metrics. According to ARN, enplanements have
increased by a 1.9% CAGR and combined F&B and N&G RPE has increased by
a 4.6% CAGR from 2009 to 2014 in the top 30 North American airports based on
RPE. OTG has been a key contributor in driving this RPE growth during this
period. In addition, during this period, total revenue from F&B and
N&G concession sales at these airports increased by a 6.7% CAGR. In 2014,
F&B and N&G concession sales at the top 30 North American airports by
enplanements were $5.2 billion, generated from 576 million enplanements. They
believe that these growth trends will continue as the FAA projects positive
growth in enplanements over the next 10 years. Additionally, as described
below, they believe RPEs will increase in the future due to a number of
favorable factors.
Airport
concessions provide important and necessary passenger services. Concession
revenues are a significant part of the airport business, and they believe that
airport authorities and airlines have increasingly focused on growth in this
area. Several factors that impact the air traveler experience are also
driving increases in RPE. These factors include the increased use of the
hub-and-spoke airline model, lengthy security procedures and flight delays and
a significant increase in the amount of dwell time. According to ARN, average
dwell times can last more than 90 minutes at certain airports like Kennedy. Meeting
the travelers’ in-terminal F&B needs has also become more important as
in-flight meals have been eliminated or offered for purchase with limited
selection and quantity and often with inferior quality. Travelers are
increasingly demanding other and often healthier dining alternatives to the
typical fast food franchises and have demonstrated a willingness to spend more
on the higher-quality products and services offered by OTG.
Given that airport
concession contracts generally have a term of between seven and ten years, they
expect to have significant and consistent opportunities to bid for concession
contracts, including at major hubs, over the next ten years as existing
contracts expire. In
connection with these expirations, and as a result of all of the above
described dynamics, they believe many airports and airlines will be
interested in redeveloping existing or outdated airport F&B concessions
that have often relied heavily on a collection of separate franchised fast food
or other licensed chain restaurant concepts. They believe this is particularly
true at major hubs that can justify the significant levels of investments
required to redevelop terminal concession programs. In the
Statement of Operations Data:
|
|
Fiscal Year Ended(1) |
Thirty-Nine Weeks Ended |
||||||||||
|
($ in
thousands) |
2014 |
2013 |
September 27, |
September 28, |
||||||||
|
|
|
|
(unaudited) |
(unaudited) |
||||||||
|
Net sales |
$ |
273,603 |
|
$ |
219,708 |
|
$ |
285,321 |
|
$ |
199,759 |
|
|
Costs and
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and
related expenses |
|
85,243 |
|
|
68,745 |
|
|
86,860 |
|
|
61,747 |
|
|
Personnel |
|
74,043 |
|
|
58,850 |
|
|
79,286 |
|
|
54,327 |
|
|
Occupancy |
|
36,102 |
|
|
30,661 |
|
|
35,592 |
|
|
26,246 |
|
|
Controllables |
|
17,360 |
|
|
15,433 |
|
|
16,580 |
|
|
12,657 |
|
|
Selling,
general and administrative |
|
28,534 |
|
|
20,288 |
|
|
28,683 |
|
|
21,452 |
|
|
New business development and pre-opening
expenses |
|
11,787 |
|
|
12,421 |
|
|
12,006 |
|
|
5,528 |
|
|
Depreciation
and amortization |
|
28,820 |
|
|
20,375 |
|
|
28,544 |
|
|
19,673 |
|
|
Total costs and
expenses |
|
281,889 |
|
|
226,773 |
|
|
287,551 |
|
|
201,630 |
|
|
Other operating
income, net |
|
2,103 |
|
|
1,159 |
|
|
896 |
|
|
1,843 |
|
|
Loss from
operations |
|
(6,183 |
) |
|
(5,906 |
) |
|
(1,334 |
) |
|
(28 |
) |
|
(Gain)/loss on
warrant liability |
|
(4,780 |
) |
|
27,480 |
|
|
73,370 |
|
|
(5,567 |
) |
|
Interest
expense, net |
|
44,787 |
|
|
28,556 |
|
|
41,141 |
|
|
30,134 |
|
|
Loss before
provision for income taxes |
|
(46,190 |
) |
|
(61,942 |
) |
|
(115,845 |
) |
|
(24,595 |
) |
|
Provision for
income taxes |
|
302 |
|
|
268 |
|
|
275 |
|
|
216 |
|
|
Net loss |
|
(46,492 |
) |
|
(62,210 |
) |
|
(116,120 |
) |
|
(24,811 |
) |
|
Less: Net gain attributable to
non-controlling interest |
|
167 |
|
|
59 |
|
|
262 |
|
|
153 |
|
|
Net loss
attributable to the Company |
$ |
(46,659 |
) |
$ |
(62,269 |
) |
$ |
(116,382 |
) |
$ |
(24,964 |
) |
|
|
(1) |
They use a 52- or 53-week fiscal year ending on the last Sunday
closest to December 31. Fiscal 2013 and fiscal 2014 ended on December 29,
2013 and December 28, 2014, respectively. Fiscal 2013 and fiscal 2014 were
52-week fiscal years |
Balance Sheet Data:
|
|
As of Fiscal Year End |
As of |
|||||||
|
($ in thousands) |
2014 |
2013 |
|||||||
|
|
|
|
(unaudited) |
||||||
|
Cash |
$ |
42,334 |
|
$ |
3,481 |
|
$ |
20,666 |
|
|
Total current
assets |
|
52,333 |
|
|
11,185 |
|
|
33,004 |
|
|
Property and
equipment, net |
|
191,485 |
|
|
153,488 |
|
|
213,072 |
|
|
Other assets |
|
1,338 |
|
|
1,035 |
|
|
2,020 |
|
|
Total assets |
$ |
276,452 |
|
$ |
182,832 |
|
$ |
277,458 |
|
|
Total current
liabilities |
$ |
48,391 |
|
$ |
40,604 |
|
$ |
42,421 |
|
|
Long-term debt,
net of current portion |
|
379,123 |
|
|
238,629 |
|
|
427,727 |
|
|
Total
liabilities |
|
468,138 |
|
|
328,686 |
|
|
584,290 |
|
|
Total equity
(deficiency) |
|
(191,686 |
) |
|
(145,854 |
) |
|
(306,832 |
) |
|
Total
liabilities and equity (deficiency) |
$ |
276,452 |
|
$ |
182,832 |
|
$ |
277,458 |
|
Target
Markets
Expansion
into new airports and terminals in major airports. They believe significant new business development
opportunities will continue to arise for the foreseeable future for expansion
into airports or terminals in major hubs and other large-market, high-traffic
airports where they do not currently operate. While they have expanded significantly since 2008, they
remain in the very early stages of their overall growth plan, having operations
in only 23 terminals across 10 airports in
They have developed
a near term growth plan that targets four new entire terminal concession
programs in 2016 and up to seven in 2017. Over the longer-term, they believe they can significantly grow their
footprint in new and existing markets by obtaining new contracts for entire
terminal concession programs while generating some of the highest RPEs in the industry.
They typically target entire terminal concession programs of various sizes,
which, based on the number of terminals in a given project and enplanements per
terminal, could generate a wide range of revenues. They generally expect
their smaller projects to generate on average approximately $40 million in net
sales, their mid-sized projects to generate on average approximately $85
million in net sales and their larger projects to generate on average
approximately $180 million in net sales. The size and timing of new
projects can have a material impact on their business as new contracts are
awarded. The higher enplanements and RPEs generated in major market and hub
airports reduce their investment risk as they can more easily support the level
of investment they typically make in order to deliver the OTG Experience. Their
goal is to take over entire terminal concession programs, where possible,
rather than operate individual concessions. While they will continue to monitor
and selectively respond to RFP opportunities, they believe that a substantial
portion of their future growth may be driven largely through privately
negotiated agreements, including buyout opportunities, outside of the public
RFP process.
Increase
sales in existing operations. Their goal is
to grow their existing operations by increasing the frequency of customer
visits and sales through the continued delivery of the OTG Experience. They
intend to increase their capture rate by continuing to evolve their design and
offerings and creating fresh and dynamic concepts and menus. They expect
that these efforts will lead to an increase in the number of travelers that
visit their concession locations and order their products, and ultimately grow their
sales. As travelers pass through airports where they operate and become more
familiar with the OTG Experience, they hope to create loyalty to their
proprietary concepts and brands. They believe that these factors will increase
sales in their current locations.
Leverage
their technology to create new revenue streams in new and existing locations. Their
goal is to place one tablet for each seat at their restaurants and certain
other F&B locations and at a majority of the seats in the gate-hold rooms
of the terminals in which they operate. They believe the repeated and
continuous interaction of their customers with their tablets will generate
higher RPE and an increasing number of opportunities to develop additional and
potentially significant revenue streams.
The following
initiatives represent significant growth opportunities for them, both for
locations where they have not yet placed tablets and for locations where
tablets are currently deployed:
Company's
Unique Strengths
Delivering
the OTG Experience. They have been recognized throughout
the industry for elevating the air travel experience, earning numerous
accolades for themselves and their airline and airport partners, including: “50 Most Innovative Companies of 2014”
Fast Company, and “The Judges’ Award for Driving Innovation in Airports”
International Airport Food & Beverage FAB Awards (2014). The unwavering
focus on the key drivers of the OTG Experience differentiates them from their
competitors. They believe that delivery of each of the elements of the OTG
Experience—(1) inviting hospitality, (2) authentic dining experiences, (3)
thoughtful and innovative design and (4) state-of-the-art technology—creates a
superior value proposition for travelers and their airline and airport partners
that will continue to lead to market share growth and some of the highest RPEs
in the industry.
Their
performance has generated increasing demand for the types of programs that OTG
offers and has led to significant additional growth opportunities through
privately negotiated agreements and both public and private
request-for-proposals (“RFP”) processes. Over the past five years, they have
won approximately 89% of the contracts they have pursued when competing for
entire terminal concession programs. As a result, they have doubled their
market share for F&B in the top 50 performing North American airports by
RPE from approximately 3% in 2008 to approximately 6% of sales in 2014. Airport
travelers also respond favorably to the breadth of their high-quality dining
options, atmosphere, conveniences and services they offer and, ultimately,
they spend more at OTG operated concession locations. Concession programs
operated by OTG, especially its entire terminal concession programs, rank
highly amongst the top 50 performing North American airports by RPE and
consistently generate some of the highest RPEs in the industry. Their ability
to generate higher revenue is evidenced by what they call takeover growth – the
growth in RPE when comparing their first full year of operations with the year
prior to when they took over a concession program – which has averaged 26%
across their entire terminal concession programs.
Differentiated
business model. They continue
to learn and evolve, and over the past 20 years have worked on refining their
business model to address the needs and preferences of their customers and
partners. By relying almost exclusively on proprietary concepts, they create
a differentiated experience for their customers, avoid paying franchise fees
and are well positioned to take advantage of changes in consumer trends and
commodity costs. Unlike most of their competitors that rely on licensing
and franchising restaurant brands, they have full control over almost all of their
restaurant concepts and menus and are able to react quickly and effectively to
changes in consumer needs. They re-design terminals around the customer
experience and increase points of sales throughout the terminal by creating
revenue generating capacity from previously unproductive and dormant space,
such as gate-hold rooms. Their technology also sets them apart and results in
many customer benefits, additional revenue generating opportunities as well as
cost savings. Today, they focus on pursuing the most complex, yet most
rewarding, projects at the busiest airports and seek to grow at major hubs and
other large-market, high-traffic airports. Where possible, they aim to take
over responsibility for entire airport or entire terminal concession programs,
rather than to simply operate individual or small numbers of concession
locations, which they believe allows them to benefit from economies of
scale and deliver all of the elements of the OTG Experience.
Strong
business partnerships. Their ability
to deliver the OTG Experience has led to strong long-term relationships with their
airline and airport partners. Their successful track record and meaningful
relationships with their partners have led to high contract win rates and
additional business opportunities. Further, they have been able to
negotiate concession agreements on favorable terms that include longer lease
terms, lower percentage rents and greater operational flexibility for them, but
that still result in higher absolute dollar returns to their partners. By
custom designing and operating separate and unique concepts for each airline
and airport, they allow these partners to leverage the OTG Experience to
enhance their own brands and drive their own customer loyalty initiatives. For
example, they work with their airline partners to extend special services to
their most frequent and valued customers and develop ways to interact with
their loyalty programs, such as their “pay with miles” function for United
Airlines. The favorable press they have garnered for their larger entire
terminal concession programs have also generated billions of media impressions
for their airline partners that have significant dollar value. Moreover, their
demonstrated ability to design, develop, operate and manage entire terminal
concession programs relieves their airline and airport partners of much of the
burden of managing all or a part of these programs themselves.
Significant
barriers to entry. They believe that their business model
is not easily replicated even by seasoned concession operators, as they have
been delivering the OTG Experience for the last 20 years, and that there are
significant barriers to entry for potential new competitors, particularly for
entire terminal concession programs. The
intensive capital requirements that underpin their highly differentiated
programs and their ability to generate some of the highest RPEs in the industry
limit both the willingness and the ability for other operators to compete with them.
They understand and effectively manage the myriad of legal, regulatory and
logistical obstacles involved in operating a business in a heavily regulated
and secure environment. Given the strict security at airports, they have the benefit
of a streamlined onboarding process for their crewmembers, including FBI
fingerprinting and background checks. In addition, their experienced teams
specialize in delivering new projects within extremely compressed time tables
in a variety of circumstances. They have repeatedly demonstrated an ability to
transition and transform an entire terminal concession program virtually
overnight without disruption to the overall business or other airport
operations. They can manage the logistics for the largest phased transitions as
well. For example, in 2014, during the takeover of
Attractive
terminal-level economics. OTG’s proven business model results in
strong terminal-level economics characterized by some of the highest RPEs in
the industry, attractive operating margins and strong cash flow generation on
an individual contract basis. Whenever they
take over an entire terminal concession program from a prior operator, they
generate takeover growth of 26% on average, in the first full year of
operations. Their ability to quickly transition concession facilities from
prior operators and open (at least) temporary concessions enables them to
generate revenue with minimal construction or renovation delays. For entire
terminal concession programs, they are generally able to achieve run-rate
revenue within the first 24 months following the completion of construction,
which refers to a month during which revenue, on an annualized basis, reflects
the amount of revenue projected for a fully operational business. The
breadth of their F&B concepts also allows them to provide service during
all day parts, including breakfast, lunch, dinner and late night. As such, OTG
has been able to achieve, sustain and grow some of the highest RPEs in the
industry.
They target a
terminal-level contribution margin of at least 20%. They believe that these
margins are higher than their peers as a result of the proprietary nature of
OTG restaurants, resulting in no franchising fees, lower terminal rents and
greater efficiencies through the use of technology. Their tablet based ordering systems allow them to
operate with a more efficient labor and inventory management model than typical
restaurants. Further, they do not require large marketing and advertising
budgets like other restaurant businesses. For entire terminal concession
programs, they target a sales to investment ratio of 1:1. Once all of the
initial capital expenditures are made, there are minimal ongoing capital
expenditures required. The combination of their industry leading revenue
generation which they calculate based on their takeover growth, and strong
margins allow them to target terminal-level pre-tax internal rates of return
(“IRR”) for the contract term and extension option periods in excess of 30%. Their
terminal-level economics are underpinned by their long-term contracts and their
stable customer base.
Company's
Unique Risks
Their
business and results of operations depend in significant part on the future
performance of the airline and travel industry, and their airline partners in particular, and their
revenue growth is in part tied to continued growth in air travel.
They have
experienced net losses in the past, and they may continue to experience net
losses in the future. They
experienced net losses of $62.3 million and $46.7 million in fiscal 2013 and
fiscal 2014, respectively. They have historically incurred net losses because
of their high growth rate, which has resulted in significant capital
expenditures and associated depreciation and amortization, and high interest
expense. They expect they will continue to incur net losses for the
foreseeable future for these reasons. They cannot assure you that they will
achieve profitability in future periods.
A
significant portion of their net sales are derived from airports in the
Their
expansion into new airports may present increased risks due to their
unfamiliarity with those areas. Their
growth strategy depends upon expanding into markets where they have little or
no meaningful operating experience. Those locations may have demographic
characteristics, consumer tastes and discretionary spending patterns that are
different from those in the markets where their existing operations are
located.
They rely
on their customers spending a significant amount of time in the airports where
they operate and a change in customer habits or changes in transportation
safety requirements and procedures could harm their business and results of
operations. Since most
of their concession locations are situated beyond the security checkpoints at
airports, they rely on their customers spending a significant amount of time in
the terminal and hold room areas of the airport terminals where they have
concession contracts. Changes in their customers’ travel habits prior to
departure, including an increase in the availability or popularity of airline
first-class lounges, or an increase in the efficiency of ticketing,
transportation safety procedures and air traffic control systems could reduce
the amount of time that their customers spend at their concession locations.
If they are
unable to protect their customers’ credit card data and other personal
information, they could
be exposed to data loss, litigation and liability, and their reputation could
be significantly harmed.
Their
success depends in part upon the popularity of their chef partners and if they are unable to maintain such
relationships their business could be adversely affected.
They may
experience increased labor costs, including for employee health care benefits. Various federal, state and local labor laws, rules
and regulations govern their relationships with their crewmembers and affect
operating costs. With the passage in 2010 of the U.S. Patient Protection and
Affordable Care Act (the “ACA”), they are required to provide affordable
coverage, as defined in the ACA, to all employees, or otherwise be subject to a
payment per employee based on the affordability criteria in the ACA.
Additionally, some states and localities have passed state and local laws
mandating the provision of certain levels of health benefits by some employers.
They are
subject to the risk of union disputes and work stoppages at their locations,
which could have a material adverse effect on their business. As of December 31, 2015, 76% of the crewmembers
at their locations are covered by collective bargaining agreements, under
contracts running through 2015 to 2018. They are also often subject to airport
“labor harmony” policies, which require, or effectively require that they
employ unionized workers. In addition, negotiating labor contracts, either
for new locations or to replace expiring contracts, is time consuming or may
not be accomplished on a timely basis.
OTG EXP,
Inc.’s only material asset after completion of this offering will be its
interest in the LLC, and it is
accordingly dependent upon distributions from the LLC to pay taxes, make
payments under the Tax Receivable Agreement, pay dividends and pay other
expenses. Their stockholders’ claims will be structurally subordinated to
all liabilities of the LLC.
Rick
Blatstein, through his control of the Principal Stockholders, will continue to
control them following this offering and his interests may conflict with or
differ from your interests as a stockholder. The concentration of their voting power may
adversely affect the ability of new investors to influence their policies.
Immediately following this offering and the application of net proceeds
therefrom, Rick Blatstein, through his control of the Principal Stockholders,
will beneficially own approximately 53.0% of the LLC Units and all of the
outstanding shares of their Class B common stock. Each share of their Class
B common stock will initially entitle its holders to ten votes on all matters
presented to their stockholders generally. Because they hold their economic
ownership interest in their business through the LLC, rather than through the
public company, these existing owners may have conflicting interests with
holders of shares of their Class A common stock.
Following
the consummation of this offering, their existing owners will have the right to
have their LLC Units exchanged for an aggregate of 54,771,722 shares of Class A
common stock under certain conditions. If these LLC Units are exchanged for Class A common stock, their
issuance would have a substantial dilutive effect on the percentage ownership
of their current stockholders.
Bottom Line
During fiscal
2012 to 2014, they grew from 111 F&B locations in eight airports to over
220 locations across 10 airports. From 2013 to 2014, their net loss decreased
25.3% to $46.5 million. In the first three quarters of 2015, their net sales
increased 42.8% to $285.3 million and their net loss increased 368% to $116.1
million, driven substantially by a $73.4 million loss on warrant liability.
During the same time period, their net sales grew from $146 million to $274
million, representing a 23% compound annual growth rate. They estimate that net
sales will be approximately $380 million for fiscal 2015. This represents net
sales growth of 39% over fiscal 2014. The increase in net sales is primarily
due to expansion into two new airports,
They are one
of the leading airport food and beverage (“F&B”) operators in North America
with more than 220 locations in 23 terminals across 10 airports, among the most
frequently traveled airports in North America, including Kennedy, LaGuardia,
Newark, Philadelphia, Reagan, Minneapolis-St. Paul and Toronto-Pearson through
the following:. Over the past 20 years, they have expanded their offerings from
F&B to include N&G and concession management services. They have become
a one-stop airport solutions provider with a demonstrated ability to design,
develop, operate and manage entire terminal concessions programs. OTG’s
customers are comprised of two distinct groups. The first group, which they
refer to as their business partners, includes airlines, airport operators and
concession program managers, and increasingly other commercial enterprises
seeking to leverage the impact of the OTG Experience. The second group consists
of the tens of millions of people each year that pass through the airports
containing OTG operations, as well as the employees and crewmembers of their
airline and airport partners. Through their interactive tablet programs,
travelers can order everything from gourmet sandwiches and salads, to sushi and
steak accompanied by a fine wine or a locally-brewed craft beer, which will be
delivered to their seat in one of their restaurants or even at the gate.
Travelers can also charge their personal devices at an array of tabletop
outlets and USB ports and use their tablets to surf the Internet, play games,
order personalized services or shop with their retail partners. They create
culturally inspired, authentic food programs through relationships with
renowned local, national and international chefs, including Michelin-starred
chefs, James Beard award winners and Iron Chefs. Their food and beverage
concepts are known for award-winning cuisine across a broad spectrum of styles
and service options, from food courts to full-service dining, to grab-and-go
gourmet markets. They have changed traditional gate-hold areas beset with tight
and limited seating and services, into revenue generating spaces containing
comfortable restaurant, bar and lounge seating and offering a variety of
service and entertainment options. They are known as the company that put iPads
in airports, and their program is on track to be one of the largest
consumer-facing deployments of the iPad in the world. Their tablet program
provides more accurate ordering (in over 20 languages) and faster delivery and
check-out services. Their tablet platform allows for the creation of additional
sources of revenue from advertising, marketing, gaming and entertainment
programs with other business partners including credit card companies, car
rental companies and online shopping sites.
They are in
the process of finalizing agreements to operate to ten F&B and N&G
locations, develop 15 holdrooms and manage ten concession locations in the
terminal as a sublessor in the Philadelphia, Terminal B, airport and have
finalized an agreement relating to the redevelopment of the concession program
for all of Terminals B South, C and E of Houston. They currently plan to
operate the majority of approximately 76 F&B and N&G locations, and to
serve as property manager for the F&B and N&G locations they do not
operate, as well as more than 30 specialty retail locations, and to develop 90
holdrooms.
Enplanements
have increased by a 1.9% CAGR and combined F&B and N&G RPE has
increased by a 4.6% CAGR from 2009 to 2014 in the top 30 North American
airports based on RPE. OTG has been a key contributor in driving this RPE
growth during this period. Total revenue from F&B and N&G concession
sales at these airports increased by a 6.7% CAGR. In 2014, F&B and N&G
concession sales at the top 30 North American airports by enplanements were
$5.2 billion, generated from 576 million enplanements. Concession revenues are
a significant part of the airport business, and they believe that airport
authorities and airlines have increasingly focused on growth in this area.
Given that airport concession contracts generally have a term of between seven
and ten years, they expect to have significant and consistent opportunities to
bid for concession contracts, including at major hubs, over the next ten years
as existing contracts expire. They believe many airports and airlines will be
interested in redeveloping existing or outdated airport F&B concessions
that have often relied heavily on a collection of separate franchised fast food
or other licensed chain restaurant concepts. They believe this is particularly
true at major hubs that can justify the significant levels of investments
required to redevelop terminal concession programs.
They believe
significant new business development opportunities will continue to arise for
the foreseeable future for expansion into airports or terminals in major hubs
and other large-market, high-traffic airports where they do not currently
operate. They expect to have significant and consistent opportunities to bid for
concession contracts, including at major hubs, over the next decade as existing
contracts expire. They have developed a near term growth plan that targets four
new entire terminal concession programs in 2016 and up to seven in 2017. They
intend to increase their capture rate by continuing to evolve their design and
offerings and creating fresh and dynamic concepts and menus. Their goal is to
place one tablet for each seat at their restaurants and certain other F&B
locations and at a majority of the seats in the gate-hold rooms of the
terminals in which they operate. They believe the repeated and continuous
interaction of their customers with their tablets will generate higher RPE and
an increasing number of opportunities to develop additional and potentially
significant revenue streams. Their tablet platform generates advertising and
marketing revenues. They believe that the size of this revenue stream will grow
over time as the potential power and reach of the tablet platform as a
marketing medium is further accepted and understood by advertisers and their
business partners. They are working on creating digital entertainment and
gaming content for purchase and free, advertising-driven content to be enjoyed
by their customers on tablets that often provide faster connectivity to the
Internet at the airport than personal devices. They believe information gleaned
from their databases will help to further increase sales and RPE via the
recommendation and targeted marketing of specific additional products and services,
including those of their business partners. They will continue to develop ways
to integrate their technology with business partner loyalty programs and accept
payment in alternative forms of currency as they have recently done with the
pay with miles function for United Airlines.
They have
been recognized throughout the industry for elevating the air travel
experience, earning numerous accolades for themselves and their airline and
airport partners. By relying almost exclusively on proprietary concepts, they
create a differentiated experience for their customers, avoid paying franchise
fees and are well positioned to take advantage of changes in consumer trends
and commodity costs. Their successful track record and meaningful relationships
with their partners have led to high contract win rates and additional business
opportunities. They believe that their business model is not easily replicated
even by seasoned concession operators, as they have been delivering the OTG
Experience for the last 20 years, and that there are significant barriers to
entry for potential new competitors, particularly for entire terminal
concession programs. OTG’s proven business model results in strong
terminal-level economics characterized by some of the highest RPEs in the
industry, attractive operating margins and strong cash flow generation on an
individual contract basis. They target a terminal-level contribution margin of
at least 20%. They believe that these margins are higher than their peers as a
result of the proprietary nature of OTG restaurants, resulting in no
franchising fees, lower terminal rents and greater efficiencies through the use
of technology.
Their
business and results of operations depend in significant part on the future
performance of the airline and travel industry. They have experienced net
losses in the past, and they may continue to experience net losses in the
future because of their high growth rate, which has resulted in significant
capital expenditures and associated depreciation and amortization, and high
interest expense. They derived approximately 69% of their net sales in the
thirty-nine weeks ended September 27, 2015 from airports located in the