60-40 Studio City ownership inefficient: Bernstein
Studio City, a new Macau casino resort 60-percent owned by Melco Crown Entertainment, accounts for approximately 6 percent of mass-market tables in Macau but only around 4 percent of the city’s casino gross gaming revenue (GGR) from table games, said a note on Friday from brokerage Sanford C. Bernstein Ltd.
“Studio City’s performance since opening has been lacklustre,” said analysts Vitaly Umansky, Simon Zhang and Clifford Kurz.
They stated the lack of VIP gaming was an important factor. “The casino has mass operation with no VIP and very limited high-end premium mass play. Consequently, it takes a longer time to ramp and drive profitability,” they added.
The decision not to have junket rooms at Studio City’s casino was a “business decision” driven mainly by the size of the gaming property’s new-to-market table allocation from the Macau government, said Lawrence Ho Yau Lung, co-chairman and chief executive of Melco Crown, at the official opening day on October 27.
Another investment analyst had previously told GGRAsia that as margins on VIP table gaming in Macau were normally thinner than on mass-market table games, it might make sense for the company to retain any VIP business at its 100-percent owned Macau properties City of Dreams Macau and Altira Macau, rather than to develop such business at Studio City, in which it has only a 60 percent interest.
Sanford Bernstein said in its Friday note: “The 60/40 ownership structure [of Studio City] is currently an overhang to achieve optimal level of ramp up and operation.”
It added: “Melco Crown is highly unlikely to move tables from other properties to Studio City (free of charge), and in our view has not been active in pushing high-end business into the property. We believe the 60/40 ownership creates operational inefficiencies, which may continue in the near-term until Studio City becomes wholly owned, at which point we see Melco Crown ‘stepping on the gas’ and driving better performance.”
The analysts however do not expect Melco Crown to buy the 40 percent minority interest in Studio City “until late 2016 or 2017”.
“The difficulty around such a transaction is largely around valuation and price, and whether Melco Crown may be willing to pay for synergies and value creation that it brings as a 100 percent owner. However, the valuation gap must be bridged to consummate a transaction,” added the Sanford Bernstein team.
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