Just weeks after MGM Resorts completed a split with a new REIT, MGM Growth Properties, owning most of the company’s resorts, criticism has resumed at the board level. Minority shareholder Land and Buildings Investment Management, which pushed for the split, says senior management is still failing to run the company correctly, causing the stock to be severely undervalued.
In a letter to the company’s board of directors, Land and Buildings attacked Chairman and CEO Jim Murren for this inaction.
“We have waited patiently for MGM’s severely undervalued stock price to recover to fair value since the company announced last year a profit enhancement plan and REIT formation. However, it has become clear to us and, we believe, to the investment community as well, that despite the company’s recent efforts, this plan has not been optimally executed and shareholders do not trust Jim Murren, chairman and CEO, to enhance shareholder value and shepherd the company into the future.”
Land and Buildings says that MGM Resorts trades at only 7X EBITDA while competitors Las Vegas Sands and Wynn trade between 14X and even “inferior” regional operators trade at 8X or better. And the shareholder contends that the three MGM “crown jewels” of Bellagio, CityCenter and MGM Grand are worth more by themselves than the entire enterprise value of MGM Resorts.
According to Land and Buildings, other problems with MGM include:
“•MGM Resorts stock has underperformed its closest peers LVS and WYNN by nearly 900% since Mr. Murren became MGM’s CEO in 20086.
• MGM has persistently traded at a discounted EBITDA multiple valuation to LVS and WYNN since Mr. Murren became CEO.
• CEO & Chair Murren burdened the company with an overleveraged balance sheet through ill-fated developments and poorly timed stock buybacks that necessitated massive equity issuance and 76 percent expansion of the share count to avoid bankruptcy.
• MGM’s return on invested capital during CEO & Chair Murren’s tenure has been paltry versus its closest peers, including over $4.5 billion of impairments during his tenure and the disastrous $9 billion City Center project.
• CEO & Chair Murren oversaw the implementation of a dead hand proxy put in 2012, which is an egregious entrenchment technique.”
The letter points to the most recent action, buying more of Pansy Ho’s share of MGM China as proof of Murren’s poor management style.
“Investors need to look no further than the recent $325 million purchase by MGM Resorts of MGM China stock from MGM China’s Co-Chairman Pansy Ho to understand how Mr. Murren undermines investor confidence. Why was it necessary for MGM Resorts to pay a 17 percent, or $50 million, premium to purchase MGM China stock from Pansy Ho? Was it to provide Pansy Ho with capital to buy shares in MGM Resorts from the estate of MGM’s largest shareholder Kirk Kerkorian? Was this another entrenchment maneuver to hand Pansy Ho, a friendly shareholder of Mr. Murren, 4.8 percent ownership of MGM Resorts so Mr. Murren could count on her vote to secure his position as Chairman and CEO of MGM?
“Why would Mr. Murren, who committed to reducing leverage at MGM Resorts, invest $325 million in MGM China stock above a 14x multiple when he could have purchased MGM Resorts at 7x multiple? It is self-evident to us that Mr. Murren cannot be trusted with shareholder capital.”
The letter concludes with a challenge to the board.
“It is time for the board to look out for the interests of all MGM Resorts shareholders by ensuring that MGM Resorts has the right leadership to unlock and sustain value for the future.”
