GGRAsia – Studio City minority buyout possible at US$1 bln: analysts

Studio City minority buyout possible at US$1 bln: analysts

Jun 24, 2015 Newsdesk Latest News, Macau, Top of the deck

Asian casino developer Melco Crown Entertainment Ltd could potentially buy out its minority partners in the Studio City project (pictured) in Macau for about US$1 billion, says a note from brokerage Sanford C. Bernstein.

Melco Crown holds 60 percent of the scheme, while New Cotai LLC – controlled by funds managed by United States-based investment firms Silver Point Capital LP and Oaktree Capital Management LP – owns the remaining 40 percent.

In June 2011, Melco Crown paid US$360 million to take over 60 percent leadership of the scheme from New Cotai, which at that time had a different ownership structure. The valuation would seem to imply that New Cotai’s residual minority stake of 40 percent was worth US$240 million at that time. That is not a strictly apples with apples comparison however, as money had already been spent by the original investors on the scheme’s foundations, and US$100 million of Melco Crown’s investment was paid to the then shareholders of New Cotai.

Noting that a new credit facility announced by Melco Crown on Friday would provide the casino company with over US$1 billion in additional liquidity, on top of US$1.7-billion unrestricted cash on hand, Sanford Bernstein analysts Vitaly Umansky, Simon Zhang and Bo Wen stated: “We believe the additional liquidity may be used in relation to the potential acquisition of the 40 percent joint venture partner in Studio City, which we argue could be a near-term catalyst.”

They added: “We estimate that the 40 percent interest in Studio City held by New Cotai can be acquired by MPEL [Melco Crown] at a price tag of approximately US$1 billion.”

Mr Umansky served as senior vice president and chief financial officer for New Cotai Holdings LLC – under a different equity ownership structure from the current New Cotai LLC – for what was then known as the ‘Macao Studio City’ project, between 2007 and 2011.

“Should the acquisition be completed, it would remove a key risk overhang for the stock. The low number of tables allocated to Galaxy [Macau] Phase 2 may imply that Studio City will likely get a similar allocation,” said Sanford Bernstein, referring to the 150 new-to-market tables granted by the Macau government to Galaxy Entertainment Group Ltd’s HKD19.6-billion (US$2.5-billion) Galaxy Macau Phase 2 project, which opened on May 27.

“By acquiring minority interest in Studio City, MPEL may be more willing to reallocate under-utilised tables from City of Dreams and Altira to Studio City,” added the brokerage, referring to Melco Crown’s existing Macau casino properties.

Sanford Bernstein had mentioned in a note on June 5 the possibility of Melco Crown buying out its minority partner in Studio City. GGRAsia has approached Melco Crown for comment on Sanford Bernstein’s suggestion, but had not received a reply at the time the story went online.

June GGR

In other commentary on Macau, Cameron McKnight of Wells Fargo Securities LLC said in a note on Tuesday that Galaxy Entertainment’s chairman Lui Che Woo had stated that Galaxy Phase 2′s performance has been “satisfactory, but not as good as what we expected”.

“The chairman also noted that he expects further declines in gaming revenues should the government decide to implement a full smoking ban,” added Wells Fargo.

The institution said that based on checks through to Sunday, it expected Macau’s June casino gross gaming revenue (GGR) to decline by 39 percent to 40 percent year-on-year.

Daiwa Securities Group Inc analysts Jamie Soo and Adrian Chan said in a Tuesday note that based on unofficial industry returns for June 15 to 21 inclusive, Macau’s tables-only GGR was down 35 percent year-on-year and 8 percent week-on-week in that period.

“We continue to expect June’s total GGR to see a decline of 37 percent to 38 percent year-on-year and come in at around HKD16 billion,” they stated.

Analysts Richard Huang and Stella Xing of Japanese brokerage Nomura on Wednesday said that they expected Macau’s June GGR – for tables-only – to decline by 38 percent year-on-year and 16 percent month-on-month, implying aggregate table revenue of HKD15.7 billion.

A senior Macau official last week said June’s GGR might drop to about MOP16 billion (US$2 billion). Lionel Leong Vai Tac, Secretary for Economy and Finance, added that many government bodies had already started what he referred to as “retrenchment measures” on public spending.

A note on Wednesday from Morgan Stanley Asia Ltd analysts Praveen Choudhary and Alex Poon gave a view on the idea the authorities might step in to support the gaming industry if the Macau government runs a fiscal deficit in 2015.

“We agree that fiscal deficit is possible in 2015, but the Macau government still has fiscal reserves of MOP350 billion (as of end-May 2015) and the unemployment rate is 1.7 percent.”

Morgan Stanley noted that in 2013-14, Macau government spending was approximately 80 percent of what it had planned, and that in the current cycle the administration “could delay infrastructure projects and reduce payroll,” to offset the effects of a reduction in public income from gaming tax.

The Macau government’s fiscal surplus dropped 54.9 percent year-on-year to MOP25.28 billion in the first five months of 2015, according to official data. Public revenue fell 33.8 percent year-on-year, to MOP46.42 billion, while expenditure grew by 49.4 percent year-on-year, to MOP21.14 billion.