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Melco Crown (Philippines) Resorts Corp has set the price range for its fully-marketed top-up placement at Ps11 to Ps14 per share, which will allow it to raise between Ps10.79 billion and Ps13.74 billion ($265 million to $337 million) before any potential exercise of the overallotment option.
The company, which is the Philippine gaming unit of Macau casino operator Melco Crown Entertainment, will start bookbuilding for the deal today.
According to sources, there is enough order indications from potential anchor investors to cover the entire transaction, which may help give other investors the confidence to participate as well. The anchors are said to include strategic investors and long-only funds focusing specifically either on gaming or on the Philippines, as well as some hedge funds. Notably there is also good support from investors who are already shareholders in Melco Crown Entertainment, which is listed both in the US and Hong Kong.
The money raised from the share sale will go towards Melco Crown’s share of the $1 billion casino project in Manila’s new Entertainment City gaming hub that it is developing together with three local partners, and to complete the acquisition of the company holding all of Melco Crown Entertainment’s assets in the Philippines.
Melco Crown has said that it will need to spend about $600 million to finish the construction of the resort, which will have six hotel towers with about 967 rooms, 242 gaming tables, 1,450 slot machines as well as restaurants, bars and other entertainment facilities. A research report issued by one of the syndicate banks estimates the company’s total remaining investment, including the $106 million acquisition cost for MCE Holdings, at about $723 million.
Melco Crown, through the top-up structure, is offering approximately 981.2 million new shares as part of the base deal, which is equal to 22.3% of the enlarged share capital. This can be increased to almost 1.1 billion shares and 24.4% of the share capital if the overallotment option is exercised in full.
That is slightly less than the up to 1.2 billion shares that the company could sell as per its regulatory approval. But if the deal is priced at the top and the overallotment option is used in full, the company will raise about $377 million, which is close to its maximum capital-raising target of $400 million.
The price range is set at a discount of 15.2% to 33.3% versus Melco Crown’s current share price of Ps16.50, although with a pre-deal free-float of just 10%, investors are unlikely to pay too much attention to that. The share price jumped at the end of last year when Melco Crown Entertainment announced a reverse takeover of the company, which was then largely a shell vehicle known as Manchester International, but has hovered in a range between Ps13 and Ps17 since then.
More important is the implied market capitalisation of close to $1.2 billion to $1.5 billion on a pre-overallotment basis that will form the basis for working out the enterprise value-to-Ebitda (EV/Ebitda) multiple. Based on the consensus forecasts by the two bookrunners — Citi and UBS — the price range values the company at an EV/Ebitda multiple of 10.1 to 11.7 for 2014, or 9.1 to 10.6 for 2015, which will be its first full year of operations.
One syndicate research report projects that Ebitda, before rental payments to one of Melco Crown's Philippine partners, will reach Ps4 billion in 2014 and Ps9 billion in 2015.
This puts Melco Crown at a discount to Bloomberry Resorts, which is currently trading at an EV/Ebitda multiple of 13 times for 2014 and 11.5 times for 2015, one source said.
Bloomberry, which is controlled by Philippine businessman Enrique Razon, is one of the four holders of a licence to operate an integrated casino resort in Entertainment City and became the first one to start operations when it opened the doors to phase one of its Solaire Manila resort on March 16 this year.
Melco Crown is scheduled to open in mid-2014, with Tiger Resorts set to follow with its Manila Bay Resorts in the first quarter of 2015. The fourth licence-holder, Travellers International Hotel Group, is aiming to break ground for its Resorts World Bayshore project sometime this year with a possible completion in the first half of 2016.
Tiger Resorts is majority-owned by Japan’s Universal Entertainment Group, which will develop the casino resort together with Robinson Land, one of the largest real estate developers in the Philippines.
Travellers is a 50-50 joint venture between the Alliance Global Group of the Philippines and Genting Hong Kong, which operates a number of casinos in Southeast Asia, the UK and the US, including Resorts World Sentosa in Singapore. Travellers also operates an existing casino on a different site in Manila — the Resorts World Manila — which opened in October 2009.
Together these four resorts are expected to boost the growth of the gaming sector in the Philippines, much as has happened in Macau and Singapore as more casinos have opened up in the past few years. One syndicate research report expects gaming revenues to more than double to $3.2 billion in 2015 from an estimated $1.4 billion in 2012, and reach $4.1 billion by 2016 as the supply increases.
According to the report, factors supporting the expected growth of the gaming industry include a more favourable tax structure than in other Asian markets — the casino operators will pay a percentage of their revenues to the Philippine Amusement & Gaming Corp (Pagcor), which is the state-owned gaming regulator and casino operator, but no corporate income tax — as well as lower operating costs thanks to cheaper domestic labour, no restrictions on locals using the casinos or on Macau-based junket operators, and the fact that gaming is already embedded in the Filipino culture.
While Bloomberry has the first-mover advantage, the research report argues that the biggest advantage Melco Crown has over the competition is the backing of Melco Crown Entertainment. In addition to its experience of operating casinos in Macau, the parent has an extensive network of customers and junkets in Greater China and is also a financially strong company.
Melco Crown Entertainment currently operates the Altira Macau casino hotel, the City of Dreams resort and the Mocha Clubs, which is the largest non-casino-based operation of electronic gaming machines in Macau. It is also developing the planned Studio City Project, a cinematically themed integrated entertainment, retail and gaming resort on the Cotai strip. In 2012 it reported $5.1 billion of gaming revenues, making it the fourth largest among the Macau casino operators.
Pagcor believes that Entertainment City will help build the critical mass to attract foreign VIPs and junkets to Manila, while also tapping the largely underdeveloped domestic VIP business and the mass market. The government hopes that it will attract more tourists to the Philippines in general to help the country achieve its target of 10 million visitors by 2016, up from 3.9 million in 2011.
Meanwhile, Melco Crown, which is a joint venture between Hong Kong-based Melco International Development and Australia’s Crown Limited, has earlier said that an expansion into the Philippines, where it expects strong returns on capital, should further diversify its exposure in Asia and deliver incremental sources of earnings and cash flow.
But the project is not without risks for potential investors. As always with a greenfield project, there are execution risks, and on top of that the economic arrangement, including the division of profits, between Melco Crown and its three local partners is quite complex and could potentially give rise to conflicts of interest.
The company has teamed up with SM Investments Corp (SMIC), which is one of the largest conglomerates in the Philippines, local property developer Belle, which is majority-owned by SMIC, and Premium Leisure and Amusement, which is 100%-owned by Belle.
SMIC and Belle will supply the land and construct the shell of the buildings, while Melco Crown will be responsible for fitting out the interiors, the thematic attractions and the entertainment facilities and for adding the gaming equipment.
Melco Crown will also have the exclusive operating rights for the project and will receive approximately 50% of the gaming Ebitda and 100% of the non-gaming Ebitda. Analysts have noted, however, that it may be difficult to split gaming and non-gaming operations into entirely separate businesses.
There may also be regulatory risks, exemplified by the fact that Pagcor has already changed the licence requirements for Entertainment City once since the licences were awarded in 2009, while the potential issuance of more licences in the future could increase the competition.
The roadshow and bookbuilding is expected to last until next Tuesday (April 23), with the final price to be fixed the following day.
