PermiraÆs decision to take a 20% stake in the Macau casino operator will allow Galaxy to repay part of its outstanding debt, leaving it with a significantly stronger balance sheet and with more cash towards the future development of phases two, three and four at its Cotai Mega Resort. Phase one, which is due to open towards the end of next year, is already fully funded.
Given this improved position it was no surprise that other investors were also keen to take part in the Galaxy's future and the Merrill Lynch-led placement ended up attracting about $1.6 billion of demand. Sources say about 50 investors put in orders, including a significant portion of the companyÆs 10 largest shareholders. About half of the orders were for more than 10% of the deal each.
ôPeople like Galaxy and PermiraÆs investment validates its growth strategy,ö says one source close to the placement. ô[Permira] has experience from the gaming sector in Europe and is also an investor in retail brands like Valentino and Boss, which will be helpful as Galaxy tries to build its own brand.ö
Another observer adds that earlier concerns about whether the company would be able to obtain sufficient funding to execute its plans for the nine-hotel Cotai Mega Resort should also be put to rest with the introduction of Permira as a strategic partner.
One source says the 150 million share offering was a couple of times covered at the top of the HK$8.42 to HK$8.82 range, but added that there was also some price sensitivity as could be expected since Permira made its investment at a price of HK$8.42 per share. Typically investors would have to pay a premium for a strategic stake as they will get a certain amount of influence over the operations û Permira will get two seats on the board û and at least some investors would have tried to achieve the same price as the private equity firm.
In the end, Galaxy chose to price the offering below the mid-point of the range at HK$8.58, which was equal to a 4.7% discount to the latest closing price of HK$9 before the stock was suspended on October 5.
This is a lower discount than all but one of the 10 placements for Hong Kong-listed companies over the past four weeks. In light of that, the initial offering range at a 2% to 6.45% did seem a bit ambitious û even in the wake of PermiraÆs investment.
Aside from the usual interest from Asia, Europe and the US, the placement also attracted investors from the Middle East and Australia to Galaxy for the first time. This shows a growing conviction that the company will remain one of the major casino players in Macau even as the competition heats up.
Last month Galaxy said its first half operating results improved significantly from a year earlier, with sales up 385% and Ebitda increasing by 300%. The gains were supported by strong growth at its flagship StarWorld hotel and casino which was opened in October 2006. When announcing the Permira investment last Thursday, CFO Nigel Morrison said that Galaxy has lifted its share of MacauÆs gaming market from less than 7% in March 2006 to over 20% this March.
The placement was launched primarily to prevent GalaxyÆs free-float from falling below the required 25% since PermiraÆs stake wonÆt count as being held in public hands. Following the placement and the transaction, the Lui family and connected parties will hold about 52% of Galaxy.
As reported earlier, Permira will buy 452 million existing shares from K Wah International, a construction company that like Galaxy was founded by Lui Che-woo, and 323 million new shares issued by Galaxy at a total cost of $840 million. This will result in a cash injection of HK$2.7 billion ($351 million) into Galaxy.
The casino operator will use HK$1.3 billion of that money to repay 50% of its outstanding fixed-rate notes that are held by entities linked to the Lui family. The other 50% of the notes will be converted into 157 million ordinary shares in Galaxy, again at the same HK$8.42 price.
Together with the cash raised from the share placement, the transaction will result in a net cash injection of HK$2.7 billion for Galaxy, a debt reduction of approximately HK$2.6 billion and a HK$250 million net saving on its annual interest costs. The company estimates that its net gearing will fall to 20% from 31%, even after completing all the funding for the first phase of the Cotai resort project in 12-14 months.
This should help eliminate the drag that interest costs have had on the companyÆs bottom line following its massive land acquisition on the Cotai strip and result in another boost for the Hong Kong-listed stock. Even though the groupÆs Ebitda improved to HK$737 million in the first half from HK$186 million a year earlier, and more than doubled in the second quarter from the first, the company still reported a net loss of HK$267.8 million for the first half.
The share price too has been sluggish, hovering for the most part between HK$7 and HK$8.50 over the past 12 months. Since the earnings release on September 17, the stock has jumped 15%, however, and it is up 40% from a low of HK$6.43 in late August in connection with the opening of the rival Venetian casino resort. The shares will resume trading today.
The placement shows that Merrill Lynch, which was also an adviser to Galaxy with regard to the Permira investment, has established itself as a regular player within the gaming sector in Asia. Over the past two years it has also helped arrange a $600 million high-yield bond (with Morgan Stanley) and a $240 million convertible (with JPMorgan) for Galaxy, a $275 million convertible for Malaysia-based Genting International (with DBS and HSBC), and a $200 million exchangeable issued by Melco BPL at the end of July on a sole basis.
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