Transaction raised eyebrows
MGM Resorts International recently announced that it’s closed on a previously announced buy-up of some 188.1 million ordinary shares of its subsidiary MGM China Holdings Ltd. from Grand Paradise Macau. It paid $325 million in stock, cash and deferred cash for the shares, according to a report in Business Insider.
The transaction leaves the U.S.-based parent company with approximately 56 percent of MGM China’s outstanding common shares, up from 51 percent. Pansy Ho, CEO of MGM China, acquired 4 million MGM Resorts shares as part of the deal, increasing her ownership to 4.8 percent of that company, and approximately 22.5 percent of the China unit.
“Our increased stake in MGM China and enhanced relationship with Pansy both reinforce our belief in the long term prospects of Macau and the future success of MGM China, in which Pansy remains a significant shareholder and collaborative partner,” said Jim Murren, chairman and CEO of the company. “We remain focused on our strategic goals and believe we have taken another step to further position our company to generate sustainable value to our shareholders.”
As consideration for the MGM China shares, MGM Resorts issued approximately 7 million shares of its common stock and paid $100 million to GPM’s subsidiary, Expert Angels Ltd. The company also agreed to pay GPM or its nominee a deferred cash payment of $50 million. The shares issued to EA are expected to be registered with the Securities and Exchange Commission and have been listed on the New York Stock Exchange.
When the transaction was first announced in August, analysts were frankly baffled. Cameron McKnight of Wells Fargo wrote, “Not sure what MGM gains from this transaction. 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 taken aback. “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.”
Murren 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,” the CEO 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 could be a “long-term strategic positive” for MGM Resorts and MGM China due to Ho’s prominence in the region and her strong relationships with the Beijing and Macau government, said Japanese brokerage Nomura. “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,” the brokerage noted. “By owning more of MGM Macau, MGM Resorts is better able to use the subsidiary in Asia as its vehicle for future development.”
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.
