Macau casino concessionaire Melco Resorts & Entertainment could face delisting from the NASDAQ stock exchange due to new regulations governing some foreign companies adopted by the U.S. Securities and Exchange Commission.
According to a report by brokerage Bernstein, worries for Melco center on the Holding Foreign Companies Accountable Act (HFCAA), which requires that audits of listed companies must be conducted by firms subject to inspection by the U.S. Public Company Accounting Standards Board (PCAOB). Melco’s auditor, Ernst & Young Hong Kong, has been deemed by the agency to be unable to inspect in the Hong Kong jurisdiction, Bernstein said.
While there is no immediate risk of delisting, the HFCAA will result in a three-year countdown starting this year unless a solution can be found.
While such a scenario would be complex, Melco is not without options.
“If no agreement occurs, the solution would be for Melco to do a listing on the Hong Kong Stock Exchange (HKSE) or to potentially merge with 200.HK (parent company Melco International Development Ltd),” Bernstein said.
The brokerage suggests this could take place either by introduction of Melco stock directly on the HKSE, which is seen as faster and easier than a public stock issuance, or by a direct equity raise.
“This path takes longer and has more scrutiny,” it explained, although it “may jumpstart liquidity of the new trading shares on the HKSE.
“Melco does not necessarily need cash proceeds from a HKSE listing; however, Macau Studio City also faces the same auditor issue faced by Melco. Melco could use the HKSE listing process to finally acquire the minority interest of Macau Studio City.”
Melco also could merge with its HKSE-listed parent. “This path has complexity around arm’s length valuation in the context of a merger and residual ownership by Lawrence Ho,” the Bernstein report said. “However, there is a scenario where such a transaction makes perfect sense and should definitely be value creating for shareholders.”
Melco shares fell 9.5 percent on the day of the report, to US$6.09, having opened last Friday at US$7.96.
