Analysts: MGM China “a solid bet”
MGM Resorts International, which is preparing to open a new resort on Macau’s Cotai Strip in 2017, recently bought more shares in its Asia subsidiary, MGM China Holdings. The Vegas-based company now owns 56 percent of the China unit, up from 51 percent.
The move, first announced in August, initially confounded some analysts. MGM Resorts said it would acquire 188.1 million shares of MGM China, paying $325 million in stock, cash and deferred cash for the shares. As part of the deal Pansy Ho, CEO of MGM China, acquired 4 million MGM Resorts shares, increasing her ownership to 4.8 percent.
But a report in the Motley Fool recently said it might be a canny move on MGM’s part as Macau begins to bounce back from an historic 26-month gaming slump.
August and September finally saw increases in year-on-year gaming revenue, and as the Fool noted, even amid the downturn “Macau will still generate about three times as much gambling revenue in 2016 as Las Vegas.
“There are plenty of reasons to believe there is potential for increased total revenue going forward, such as easier access for tourists and more non-gambling entertainment appeal,” the report concluded.
MGM’s $3 billion resort in Macau, which it has dubbed “the jewelry box” of Cotai, will open in the second half of 2017 with 1,500 hotel rooms and suites, convention and meeting space and other attractions. It can expect to welcome at least some of the newly mobile middle-class Chinese, who are traveling more and more, according to the China Business Review. Chinese domestic tourism spend is expected to grow 16 percent annually through 2020 to around $615 billion, the publication reported.
James Murren, chairman and CEO of MGM Resorts, hinted during the summer that the firm may buy even more of 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,” Murren told Bloomberg News. “But I think I have to do it incrementally: going back to doing deals. You need to have a buyer and a seller.”
And the increased stake could be a “long-term strategic positive” for MGM Resorts and MGM China, said Japanese brokerage Nomura, in part because of Pansy Ho’s clout with the Beijing and Macau governments.
“When it comes time for consideration for either Macau license renewal or table allocation, having Pansy’s interest more aligned with the parent strengthens MGM Resorts’ position,” wrote Nomura analysts Harry Curtis, Brian Dobson and Kelvin Wong. “Second, by owning more of MGM Macau, MGM Resorts is better able to use the subsidiary in Asia as its vehicle for future development.”
Meanwhile, MGM has forecast total 2017 year-end adjusted EBITDA of $3.1 billion, up about 40 percent from the $2.2 billion it posted in 2015. The Fool noted that “MGM China looks like a solid bet not only for the potential to take home a larger share of its earnings, but also a show of investment in China itself.”
