Pansy wields power in Beijing, Macau
MGM Resorts has announced it will acquire 188.1 million shares of MGM China, boosting its ownership stake from 51 percent to 56 percent. It will pay $325 million in stock, cash and deferred cash for the shares, according to a report in Business Insider.
Pansy Ho, CEO of MGM China, will also acquire 4 million MGM Resorts shares as part of the deal, increasing her ownership to 4.8 percent.
Wells Fargo analyst Cameron McKnight professed to be stumped by the deal. “Not sure what MGM gains from this transaction,” he wrote. “MGM 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.”
He also said the purchase “appears expensive” and said Ho, daughter of gaming titan Stanley Ho, is “swapping Chinese for U.S. real estate exposure.
“By continuing to sell down her MGM China and increase her MGM U.S. stake, Pansy Ho is arguably reducing Chinese and increasing U.S. exposure. Some investors are asking whether Pansy Ho is a continued seller.”
Carlo Santarelli of Deutsche Bank was also baffled by the move. “In short, we expect investors to be a bit confused by the rationale for this transaction. In our view, MGM Resorts is inexpensive and MGM China is trading at top of the range multiples on our forecasts, with meaningful ambiguity in future results given the wave of new supply in a questionable top-line recovery environment.
“Lastly, in a period in which we view domestic gaming fundamentals favorably, MGM is using its equity to grow its Macau position, a market where we struggle with fundamentals.”
James Murren, chairman and CEO of the U.S.-based parent company, hinted 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.”
The deal, expected to be completed during the third quarter of 2016, could be a “long-term strategic positive” for MGM Resorts and MGM China, said Japanese brokerage Nomura.
“First, Ms. Ho has very strong industry relationships with the Beijing and Macau governments, so 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.
“Second, by owning more of MGM Macau, 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.
Deutsche Bank said in a note: “Net-net, we don’t view the transaction as tremendously needle-moving, but we do believe the added confusion around the rationale will create a modest distraction from the core MGM fundamental story.”
Analysts Vitaly Umansky and Clifford Kurz of brokerage Sanford C. Bernstein also weighed in, saying, “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 said Ho would “remain a major shareholder” in the firm and would “continue to play a significant role” in MGM China’s business.
