The junket promoter and investor reputed to be the largest in Macau is joining with a company controlled by one of Asia’s richest men to achieve what some are describing as a back-door move onto the Hong Kong Stock Exchange that would circumvent the scrutiny that normally accompanies a new listing on the exchange.
The deal involves closely held International Entertainment Corp., controlled by the family of Cheng Yu Tung, who is ranked No. 4 on Forbes’ Hong Kong wealth list, and junket giant Suncity Group.
Officially, International Entertainment wants to acquire a 70 percent stake in Suncity International Holdings, a company affiliated with Suncity, for which International is offering HK$7.35 billion, or almost $1 billion U.S. But as The Wall Street Journal noted in a report on the acquisition, it’s not certain precisely what assets this involves.
The financial structures underlying Macau’s massive junket industry are anything but transparent, and Suncity’s are no exception. The group is an umbrella organization for 17 casino VIP clubs with an estimated 280 tables, and like most of the sector operates via a web of linked entities that includes stakes in smaller junket promoters.
International says the acquisition is subject to performance guarantees, which appears to indicate the company actually would be buying into Suncity’s vast and varied revenue streams. The guarantees include at least HK$1.5 billion in EBITDA in 2013 (US$192 million), at least HK$1.68 trillion in rolling chip volume in each of 2014 and 2015, and Suncity’s access to a minimum of HK$12 billion in available credit, which would come from casino operators, junket collaborators and third-party backers.
Investment brokers Union Gaming Research Macau said Suncity should have no trouble achieving these. They consider Suncity to be Macau’s largest junket and estimate its share of the total market at 20 percent. Which, of course, is huge, considering that VIP gaming accounted for about $30 billion of Macau’s world-leading $45 billion in 2013 gross gaming revenue.
“Not unlike Las Vegas, we are seeing more and more Macau gaming-related entities embrace the concept of having publicly traded equity,” UGRM said. “We would also argue that this should have a longer-term positive impact—at least with respect to the industry’s reputation—as having a publicly traded equity requires an increased level of transparency and an increased level of oversight.”
The Journal, however, noted that International Entertainment had only HK$1.36 billion in bank balances and cash on hand as of Sept. 30, according to its interim report, and likely would fund the investment partly by issuing securities to Suncity International. This could enable Suncity International to effectively control its buyer, giving it a stock listing in Hong Kong but without the normal scrutiny and transparency requirements.
“The structure of this deal is a standard way of avoiding the stock exchange rules on reverse takeovers by ensuring that Suncity International does not end up with 30 percent or more voting control but can have a majority economic interest,” said David Webb, a prominent shareholder activist in Hong Kong and former independent non-executive director of Hong Kong Exchanges & Clearing, which operates the HKSE.
The possibility of the acquisition was first disclosed by International on Dec. 23. Only its shares had begun to surge long before that, in mid-September. On Sept. 30, International told the stock exchange it wasn’t aware of any reasons for the price movement. On Oct. 16, the Securities and Futures Commission, which regulates the exchange, said it had conducted an inquiry into the company’s structure and concluded that most of its shares were controlled by a small group. It advised investors to “exercise extreme caution when dealing in the shares”.
The group in control is the Cheng family, whose holdings include Chow Tai Fook, the largest jewelry retailer in the world. The Chengs also control a gambling venue in Manila and have deep ties to Macau. Cheng is a long-time friend of Stanley Ho’s and was at one time one of the largest shareholders in STDM, Ho’s casino operating company in the monopoly days under Portuguese rule. When the government dismantled the monopoly after Macau’s repatriation to China, Cheng was said to be interested in acquiring a casino license. The family still holds 10 percent of STDM, which is the largest shareholder in SJM Holdings, the Hong Kong-listed company that succeeded it as one of the city’s six casino concessionaires. Cheng’s son Henry is a non-executive director of SJM.
