MGM Resorts International might be willing to buy even more shares of Macau casino operator MGM China Holdings Ltd, said James Murren (pictured), chairman and chief executive of the U.S.-based parent.
Any such purchases would be “incremental” to the 4.95 percent of MGM China that MGM Resorts announced on Tuesday it would add – via a deal with Hong Kong businesswoman Pansy Ho Chiu King – to its existing 51 percent stake in MGM China.
“I believe in the long-term future of Macau and I think owning more of MGM China over time is going to be a very accretive transaction for the MGM Resorts shareholders,” Mr Murren told Bloomberg Television.
“But I think I have to do it incrementally: going back to doing deals. You need to have a buyer and a seller,” he stated, adding he had been working on a deal with Ms Ho for “many, many quarters”.
Prior to the proposal announced on Tuesday, Ms Ho held a 27.44-percent stake in MGM China, including direct and indirect interests. Once the transaction is completed, her stake will be reduced to 22.49 percent, while MGM Resorts’ stake in MGM China will increase to approximately 56 percent.
The deal is expected to be completed during the third quarter of 2016.
As part of the agreement, MGM Resorts will issue 7.06 million units of its common stock to Ms Ho and pay her a cash consideration of US$100 million. In addition, the U.S. firm will make a deferred cash payment to Ms Ho amounting to US$50 million over a period of not more than five years.
Ms Ho has separately entered into an agreement to acquire 4 million shares of MGM Resorts stock at US$25.00 per share from Tracinda Corp, founded by the late Kirk Kerkorian, who was a long-term MGM Resorts investor.
Upon completion of the two deals, Ms Ho would own a stake of approximately 4.8 percent in MGM Resorts, according to regulatory filings.
Japanese brokerage Nomura said in a Tuesday note that having Ms Ho own approximately 5 percent of MGM Resorts could be a “long-term strategic positive” for MGM Resorts and MGM China.
“First, Ms Ho has very strong industry relationships with the Beijing and Macau governments, so when it comes time for consideration for either [Macau] licence renewal or table allocation, having Pansy’s interest more aligned with the parent strengthens MGM [Resorts'] position. Second, by owning more of MGM Macau [MGM China], MGM [Resorts] is better able to use the subsidiary in Asia as its vehicle for future development,” said Nomura analysts Harry Curtis, Brian Dobson and Kelvin Wong.
John DeCree, an analyst at Union Gaming Securities LLC, said in his commentary on the deal: “In total, Ms Ho will own approximately 4.8 percent of MGM [Resorts’] equity, making her a top five shareholder of MGM. With Tracinda expected to wind down its equity stake in MGM over time, we are encouraged to see another anchor investor and buyer in the shares of MGM.”
Analysts Carlo Santarelli and Danny Valoy, of Deutsche Bank Securities Inc, said in a Tuesday note: “In a period in which we view [U.S.] domestic gaming fundamentals favourably, MGM is using its equity to grow its Macau position, a market where we struggle with fundamentals. Net-net, while we don’t view the transaction as tremendously needle moving, we do believe the added confusion around the rationale will create a modest distraction from the core MGM fundamental story.”
On Tuesday MGM Resorts International also announced that it had priced at par a public offering of US$500 million of 4.625-percent senior notes due 2026. It is expected that the transaction will close on Friday.
“MGM [Resorts] already has control of and consolidates MGM China, so we don’t see any immediate benefit from purchasing another 5 percent – especially when Macau’s fundamentals are still challenged and the tone of many of our industry conversations is ‘very glum’,” said Cameron McKnight, Robert Shore and Daniel Adam of Wells Fargo Securities LLC, referring to the share exercise outlined in Tuesday.
Nonetheless Mr Murren told Bloomberg TV that taken as a whole, the share deal sent an important signal that MGM Resorts remained committed to the Macau market.
Unlike some of its U.S.-based rivals, MGM Resorts has been conservative in its equity ownership exposure to Macau gaming operations.
MGM China is likely to open MGM Cotai – a new casino resort in Cotai, Macau – in the second quarter 2017. It will also be the first of the majority foreign-owned Macau operators to face expiry – in 2020 – of its current gaming rights. That is because the Macau casino sub-concession used by MGM China was purchased for US$200 million from Ms Ho’s father, Stanley Ho Hung Sun, via his Macau casino firm SJM Holdings Ltd. SJM Holdings’ concession expires in March 2020.
Mr Murren said of the share transaction announced on Tuesday: “This was a relatively small deal, but it’s large in the sense that directionally it signals the fact that MGM Resorts wants to own more of MGM China; it believes in MGM China’s growth long-term; and I think it’s going to have to be done in bite-sized pieces as opposed to owning a lot right away.”
Commenting on the proposed arrangement, analysts Vitaly Umansky and Clifford Kurz of brokerage Sanford C. Bernstein Ltd said in a Tuesday note: “We view a sell down by Ms Ho as slightly negative as it may signal the beginning of a long-term sell down of her position in the company. While not a near term event, Ms Ho’s departure, if it were ever to happen, may be negative for MGM China as she is politically important.”
MGM China noted in a separate release on Tuesday that Ms Ho would “remain a major shareholder” in the firm and would “continue to play a significant role” in MGM China’s business.
Until September 2014, there was a question mark over whether all relevant U.S. regulators were willing to give their blessing to business links between Ms Ho and MGM Resorts.
Her tie to MGM Resorts via an initial 50-50 Macau casino joint venture was cleared by the Nevada Gaming Commission in March 2007 after she personally gave evidence to its members.
But it wasn’t until September 2014 that the New Jersey Casino Control Commission voted unanimously to allow MGM Resorts International to re-enter the Atlantic City casino market. It came after what was described as a 20-month investigation focusing on Ms Ho.
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