Thursday, June 11, 2009

Whoops!!! There It Is - Resorts World

Genting Bhd., Asia’s largest listed casino operator, bought a 3.2% stake in MGM Mirage for US$100 million, MGM spokesman Gordon Absher said. The purchase last month was reported by The Financial Times yesterday. Genting and Resorts World each subscribed for USD50m of MGM's senior secured notes on 14 May '09 as well.

The share purchase was not disclosed to Bursa Malaysia. The shares purchased were part of MGM’s US$1bn equity offering priced at US$7.00/share in May 2009 to help repay the group’s swelling debts. The acquisition of 14.3m shares in MGM represents a small percentage of MGM’s total share base of 441m shares, and an even smaller 2% of the group’s gross cash balance. The acquisition is classified as an investment in the group’s balance sheet with no impact on earnings - however, strategically it makes a lot of sense to Genting and Resorts as that would allow them a foot in while MGM grapples with huge refinancing issues ahead. The acquisition price values MGM at 0.48x PBV and 11.2x FY10 consensus estimated EV/EBITDA, which may be relatively expensive given MGM’s high gearing and potential for future cash calls and hence dilution.

MGM is currently in discussions with its bankers and its strategic partner Dubai World to help salvage its US$8.6bn City Centre Las Vegas Resort development project, which could potentially require a new partner if MGM, Dubai World and its bankers are unable to come to an agreement on the necessary funding to ensure the completion of the project. However, Genting and Resorts are not interested in Las Vegas properties anymore. They are really keen to get a slice of the Macau action. Even after raising US$1bn from its recent equity raising exercise, MGM is still burdened with a fair degree of debt on its balance sheet with an estimated debt to equity ratio of 249%, or net debt of US$12bn. MGM would have to dispose of more assets or stakes in its existing projects to reduce the risk of bankruptcy, even with its US$2.5bn secured notes and equity raising exercise. This will certainly open up opportunities for the Genting group to participate in future project partnerships with MGM, or make outright casino acquisitions, at relatively appealing valuations.

Macau remains the group’s key geographical expansion focus as it continues to access acquisition opportunities. It is noteworthy that the Nevada gaming commission has hinted broadly that they did not particularly like MGM to be in partnership in Macau with the Ho family. While the commission's views are not binding and not enforceable, it does carry some weight. A very convenient transaction would be to swap the Ho's family stake in MGM's partnership to Genting or Resorts.

Having said that, I prefer Resorts World to Genting. One, is the overall exposure to Genting Singapore. Two, Resorts is the better vehicle for any substantive M&A given its large and growing net cash pile of RM4.9bn. This is further reinforced by the fact that management has continued to maintain that Genting will remain as an investment holding company. Resorts would have to upstream a significant portion of its cash to Genting for it to undertake large M&As.

The purchase utilized only 11% of Genting’s net cash as at end 1Q09. 48% subsidiary, Resorts World’s with its net cash of RM4.6b as at end-2008 could easily acquire a 40% stake in MGM. MGM owns 16 properties in the US and has a 50% interest in four other properties (one in Macau). Its net gearing position as at end 1Q09 stood at 318%. Should MGM decide to sell its casino assets to pare its debt, Genting will likely be well positioned to acquire them. Given that MGM recently raised USD2.5b in capital, which is insufficient to plug the holes. it is likely that MGM is planning some major asset disposals very soon.

I like Resorts World up to 2.95. Again, like I said before, I am only interested in returns of at least 30%-50% in 6 months.

4715 RESORTS 2.870 -0.010 46,384
4715CH RESORTS-CH 0.135 -0.005 7,886
4715CI RESORTS-CI 0.155 -0.005 24,790
4715CJ RESORTS-CJ 0.175 -0.005 5,657

p/s photo: Eva Huang Shenyi

1 comment:

Tony said...

CIMB's long expiry Resorts CK is a safe bet with conversion ratio of 2:1. CH also 2:1 expires August much cheaper.
As to buying MGM's stake in Macau; this could be tricky as Pansy Ho is looked upon with suspicion by the Vegas gaming board; Singapore may feel the same and this will put Resort Sentosa's gaming license in jeopardy. Remember the proposed Star Cruise sale to Stanley Ho episode.