The Flying Circus

Kris Tuttle -

Two new ones to look at today - Surf Air Mobility $THCA and Two Bit Circus $REVE!

Two Bit Circus

The Two Bit Circus describes itself as "a rag tag (sic) circus from the past with play of the future." So I guess that's something like Barnum and Bailey meet Dave and Busters $PLAY?

As a business concept, it's based on the model of the Great Wolf Lodge which is a more local "destination" for families looking to drive a couple of hours and enjoy kid features like an indoor waterpark, an arcade, indoor climbing, treasure hunts, and storytime. They also supply the adults with liberal amounts of alcohol and plenty of "comfort food." The business works from a financial perspective - Great Wolf Resorts was bought by private equity for $1.35B back in 2015 and in 2019 Blackstone invested in a new JV that valued it at $2.9B.

The deal is a combination of the Two Bit Circus itself and two hotels that will be transformed into additional sites. The existing TBC is in Los Angeles and gets good reviews (4.5 stars). I have taken my family to a similar (but simpler) version of this in Louisville and it was a fun way to spend a few hours on an afternoon.

A second location is slated to open this year in Dallas, Texas. Management believes that the concept is "ready to go national" and has identified their next two properties in Denver, CO, and Stamford, CT. They are paying $45M in cash and 2M shares of stock for the hotels which then be renovated. Management believes they are acquiring assets a low prices (based on $/key) and will get high returns on their investments in turning these into Two Bit Circus locations.

I just don't know about the "curb appeal" here!

The investor presentation is a little short on numbers but as proposed the market value is $232M. The EV would be $154M if they end up with the cash and debt they expect from closing. Generally, redemptions are running very high so that's an open question.

I do like the sound of the management team at Two Bit Circus - The CSO title includes "Roustabout" and the CTO is also "Mad Inventor." That brings up my first concern which is how these two management teams will mesh together - the wild and crazy builders at TBC versus the corporate hospitality team at Alpine Acquisition? $REVE.

The minimum cash condition is fairly low at $15M and the hotel assets can be used to secure debt financing. There is no PIPE in place so it might be a little undercapitalized.

There are a few other reasons to be careful about this one:

  1. So far there is one location. It is doing well in LA and we'll soon get some data from Dallas but it's hard to know how other new markets will perform. As a former resident of Stamford, CT it's a little hard to picture it working there. Why not build it out close to Foxwoods where you can piggyback the entertainment, gambling, and spa options there?
  2. Although Great Wolf Lodge is a proven success we don't really know if Circus + Hotel is going to be as attractive. I learned how to play craps at the Circus Circus in Las Vegas in 1984 so I have a soft spot for a circus-themed hotel but that's not an investment case.
  3. Significant renovations are fraught with delays and higher costs. The current environment is not encouraging with supply chain disruptions, higher materials costs, and labor shortages.
  4. Public comps aren't great either. Dave & Busters $PLAY has gone nowhere as a stock for 6 years and it's basically successful. I may work up a bigger list as this one gets closer to approval.
  5. Investors in the consumer travel and entertainment space have many existing choices that compete with this as an investment. The de-SPAC travel IPO family may not be great but there are established names like $ABNB and $EXPE to consider.

Surf Air Mobility

I've covered a few of these "disruptive air mobility" names over the years. This one brings some new wrinkles to a familiar topic. Back in 2008 we even had one called POGO that was out marketing their IPO. They failed to convince investors that their model could work for small airplanes but later Uber proved it might for cars. It turned out that point-to-point just wasn't practical, you need density.

Very small regional airlines can be successful operators. Cape Air is a notable example and so might Blade Mobility $BLDE but they are still an upstart compared to Cape Air.

For whatever reason, there is some obsession with making planes electric too and in some cases able to take off and land vertically. We've got a crop of those that have de-SPACed. FWIW I like Eve $EVEX the best and own some warrants on it but we are years away. I'll get a post out on the space overall and why I like that one the best at some point.

Surf Air Mobility is doing two things at the same time. The deal includes buying Southern Airlines which operates a fleet of smaller 12-seat planes from Cessna called the Grand Caravan.

At the same time, they are buying electric propulsion technology company called magniX and an aerospace engineering firm called AeroTEC. The idea is to integrate the new powertrain into the Cessna Grand Caravan. Why this is a great idea remains elusive to me. No case has ever been presented to me other than "reducing the carbon footprint of flying" which I am not against but it only works if there is an investment and business case to support it. (On a risk-adjusted basis I might add.)

I haven't seen an investor deck yet but as an operating company, they will generate $100M in revenue this year. The deal value is $1.4B in terms of EV.

There are a number of conditions and potential clauses in the deal that might prevent it from closing so we will take another look when they get further down the road. It's also an odd and diverse investor group that includes iHeart Media and Arianna Huffington. (?)