GGRAsia – Melco leverage manageable post Crown deal: Lawrence Ho

Melco leverage manageable post Crown deal: Lawrence Ho

Jun 04, 2019 Newsdesk Japan, Latest News, Top of the deck, World

Melco Resorts and Entertainment Ltd will still have a “manageable” leverage ratio – typically an indication of how much of a firm’s capital comes in the form of debt – following its 19.99-percent stake acquisition in Australian gaming operator Crown Resorts Ltd, for US$1.2 billion, says Melco Resorts’ chairman and chief executive Lawrence Ho Yau Lung (pictured).

He was speaking at a media briefing on Tuesday in Macau to discuss last week’s move on Crown Resorts.

A number of investment analysts has queried whether Asian casino developer and operator Melco Resorts can in short order manage the cost of the Crown Resorts stake; develop phase two of Macau casino resort Studio City; possibly buy out minority shareholders in that project; and manage potentially US$10-billion of capital expenditure on a Japan casino resort if it wins a licence there. Some analysts have suggested the Crown Resorts deal could be a plus for Melco Resorts’ push in Japan.

“Even with this Crown [Resorts] transaction, our leverage ratio is still much lower than most of our U.S. competitors,” Mr Ho remarked to media attending the briefing.

“Melco [Resorts] has always been conservative in its balance sheet, especially compared with the other listed U.S. operators. From the gearing standpoint, our gearing – debt to EBITDA [earnings before interest, taxation, depreciation and amortisation] – has increased from 1.9 times to 2.5 times. So it is very manageable. Compared to most other U.S. companies, [their] ratio is four, five to six times,” the Melco Resorts chairman stated.

The firm had said it was paying AUD13.00 (US$9.09) per Crown Resorts share to CPH Crown Holdings Pty Ltd. The latter company – controlled by Australian businessman James Packer – has currently a stake of approximately 47 percent in Crown Resorts.

Melco Resorts also said it intended to seek a presence on Crown Resorts’ board “commensurate with its ownership position”.

Enterprise value

Speaking in more detail about the outlook for Melco Resorts after the Crown Resorts deal, Mr Ho stated: “Usually for global gaming companies, the enterprise value [EV] over EBITDA is actually, on average, around 11 times. … with our transaction, it is around 10 times.”

“So again, it’s attractive on a valuation standpoint, especially in light of the fact that less than two months ago, Wynn [Resorts]’s offer was made at AUD14.75 per share [in Crown],” Mr Ho said.

He was drawing a comparison to talks confirmed during April involving U.S.-based casino business Wynn Resorts Ltd – parent of Macau operator Wynn Macau Ltd – and Crown Resorts regarding a possible takeover of the latter by that American firm. Soon after the discussions became public, they were terminated without a deal.

Mr Ho told the media on Tuesday: “Now that our [Crown Resorts] transaction is at AUD13.00 per share – you’ll understand part of the reason why…is because of my relationship with James [Packer], and we have been comfortable working with each other over the years.”

Crown Resorts runs a gaming resort in Melbourne, Victoria; one in Perth, Western Australia; and is developing a third at Barangaroo in Sydney, New South Wales. Crown Resorts also owns and operates Crown London Aspinalls, in the United Kingdom’s capital.

“With this transaction, our global footprint [worldwide] has increased from three countries to five countries,” Mr Ho remarked. Melco Resorts currently runs casino resorts in Macau, and Manila in the Philippines. Melco Resorts’ parent, Hong Kong-listed Melco International Development Ltd, is also part of a consortium developing a new European casino resort called City of Dreams Mediterranean in the Republic of Cyprus.

Japan push

At Tuesday’s press gathering, Mr Ho stressed that his firm’s bid for a Japan casino resort licence was its “priority”.

“Japan is our ultimate goal. And everything we’ve been building in the last few years is really to build up a strong showcase. With the [Crown’s] Australian and London assets, I think it continues to accelerate our push for Japan,” Mr Ho told reporters.

He said Crown Resorts had what he termed “globally recognised” social safeguard programmes regarding gambling. They could be a help to Melco Resorts’ Japan push, Mr Ho remarked.

He also suggested the Australian firm had a positive record in terms of urban regeneration on casino projects.

“Whether in places like Osaka, Yokohama or other [places] in Japan, they are looking at urban revitalisation. The Crown Melbourne area was before a dilapidated industrial area that was later converted into a beautiful destination,” Mr Ho said, adding that would be a “good reference” point for Japanese decision makers.

During the Tuesday gathering, Mr Ho reiterated that Melco Resorts maintained a long-term goal to acquire a further stake in Crown Resorts.

“…long term, Crown’s assets are very valuable, so our company will remain open-minded, and see how it will go,” said the entrepreneur.

Though he noted: “In Australia – just as in Hong Kong – they [the stock market authorities] have a ‘creeper rule’: for every six months, you can purchase 3 percent more,” in a firm.

“So whether it is through this ‘creeper rule’ we will gradually creep up [the shareholding in Crown], or in due course there is an overall takeover, we will check with James [Packer] and Crown’s management team,” Mr Ho stated.

“My friendship with James [Packer] for so many years [means] we are respectful to each other. I won’t do things that he doesn’t agree to,” Mr Ho added.

‘Probity reviews’, Studio City

He reiterated the fact that Melco Resorts was willing to submit on a voluntary basis in Australia – as well as in the United Kingdom – to what he termed “probity reviews” with relevant authorities following the acquisition of the Crown Resorts stake.

Mr Ho told reporters: “We’re happy to go through all the probity reviews. So I think after the probity reviews and the various checks, which we expect – because there are three [state] jurisdictions within Australia in addition to London in the U.K., we expect that process to take approximately 12 months.”

Melco Resorts’ reconnection with the Australian gaming firm – Melco International and the corporate predecessor of Crown Resorts first joined forces in the early noughties to develop resorts in Macau – could help Crown Resorts’ VIP business said Mr Ho.

The Australian firm’s VIP gambling business shrank dramatically during 2017. That came soon after a late-2016 incident that saw a number of employees – including a senior executive – detained in mainland China and later formally arrested and held in jail pending trial, for alleged “gambling-related crimes”; understood to relate to management by the company of Chinese high-roller players.

Mr Ho said on Tuesday regarding his own casino brand: “Whether it is the Greater China market or Asia, our network with premium mass guests or VIPs is strong. So in due course, we can firstly have more locations to send guests over to; on the other hand, we can help their [Crown’s] VIP and premium mass business.”

He added: “I’ll have to further discuss with James Packer and the Crown management to see how we can seek collaboration or how we can help. I have worked with James for many years and I respect their [that firm's] decisions… Going forward, there is only upside; not really further downside. After all, Australia’s economy is stable.”

In Macau, Melco Resorts is yet to start construction work for its expected US$1.4-billion expansion to Studio City. Mr Ho noted on Tuesday that his firm was still awaiting approval from relevant Macau government departments. “Hopefully it [the work] can begin by the middle or second half of this year,” he said.

When asked if Melco Resorts had any near-term interest in a buyout of the minority investors in Studio City, Mr Ho said: “With Studio City, we’re happy with our majority shareholding.

“Over the long term, I think we’re the natural 100-percent owner of it but over the years of partnership with New Cotai [LLC] or Silver Point [Capital], we just never quite got there… If one day the valuations [of Studio City] are fair and reasonable, I think we are always open-minded to take a look at it.”