A-Max deal could transform VIP gambling in Macau

The $385 million placement will almost triple the casino operator's outstanding market cap as the company enters the junket business.
Casino operator A-max Holdings yesterday kicked off the roadshow for a placement of up to HK$3 billion ($385 million) worth of new shares that has the potential of transforming the entire business model for the VIP segment of the Macau gaming sector.

The money raised by A-Max will be lent to a company called Ace High which, in turn, will provide it to junket operator AMA, which will use it to provide daily liquidity to nine collaborators that have agreed to bring their high-roller VIP clients exclusively to the Crown Macau casino. The Crown is owned and operated by Melco PBL Entertainment (Macau), which holds one of MacauÆs six gaming licenses or sub-licences.

A-Max, which is currently involved in the Macau gaming business through its 49.9% stake in the mass-market focused Greek Mythology casino, will gain a 99.99% stake in ACE by capitalising HK$50 million of the loan. This will essentially give it access to 80% of the revenues generated by AMA through a profit transfer agreement. The other 20% will go to AMAÆs owner, Francisco Albino, who counts as a third party, but has worked as a coordinator overseeing the daily operations of the New Century Hotel in Macau and the Greek Mythology Casino since 1997.

This will be A-MaxÆs first move into the junket part of the Macau gaming market, but through the agreement between AMA and the Crown, it will capture a more than 40% share of this market virtually overnight. Another clear indication of how significant this business will be for A-Max going forward is the fact that the money raised from the placement will almost triple its current market cap of about $200 million.

But what really makes observers excited about this transaction is the fact that AMA will use the cash from the loan to improve the liquidity of its junket collaborators by paying them daily commissions û effectively allowing them to provide more funding to their high-roller clients who can then spend more at the tables. According to a source, the liquidity could improve by as much as 28%-35%. Under the current structure, the junket collaborators only get paid on the seventh day of the month after they have earned the commission, which it could potentially be up to 36-37 days later.

ôThis business is all about turning over cash and if some punter from China takes seven days to pay you back, it takes out a lot of your cash,ö the source says. ôIn Macau, the only reason the punters stop gambling is because the junket operators cannot fund them anymore, so through this 28%-35% increase in liquidity, we think the whole overall market could increase in size.ö

According to an A-Max circular, the nine collaborators signed up by AMA are among the leaders in the market and together account for about HK$77.4 billion of the monthly VIP turnover in Macau. This gives them a 46% market share based on total revenue data for the past few months and suggests that A-Max and the Crown will have a significant first-mover advantage with regard to this new business model. The Crown will pay AMA a commission ranging from 1.2% to 1.35% based on the spending generated by clients brought in by the nine collaborators.

ôThe revenue numbers may be somewhat exaggerated because the last couple of months included the Golden Week holiday, but even if the market share is only 30% or 35% it is still huge and I think the threat (to the other casino operators) is more severe than people expect,ö says one Hong Kong-based gaming analyst.

The source agrees, noting that competitors like Hong Kong-listed Galaxy Entertainment and US casino operators Wynn and Sands will likely be searching for a way to respond.

ôWe think that over time they too will go to daily commissions and they will try to replicate this AMA model. However, they wonÆt be able to get these most powerful junket operators because they have already been secured by AMA and the Crown.ö

Junkets are big business in Macau since the non-convertibility of the renminbi means the VIP gambler from China cannot bring much money with them. Consequently, they rely on the junket operators to finance their purchase of chips. They also are in the hands of these operators with regard to which casino they gamble at. A junket operator typically brings clients to only one or two casinos and receives a commission based on how much they spend at the tables. Mainland Chinese gamblers are estimated to account for about 80% of the VIP market in Macau.

Based on its existing casino operations and experience, A-Max estimates that each VIP gaming table will require HK$30 million of operating capital, of which HK$15 million will be used to buy non-negotiable chips, HK$10 million to pre-pay commissions to the collaborators and HK$5 million to cover unexpected increases in business volumes. This means the HK$3 billion loan will be sufficient to cover the operation of 100 VIP tables. According to the circular, AMA plans to operate a minimum of 100 VIP tables at all times.

ôThere is a huge amount of interest in this new business model because it has implications for every casino and therefore also for a number of listed stock. But there is also definitely interest in the transaction because it will come at an attractive valuation and this it is going to be a hugely cash generative business,ö the same source notes.

According to the circular, the A-Max placement will be priced based on the current market price, but cannot be lower than HK$0.13 per share. In theory the floor could increase to 75% of the average closing price between September 11, when details of the transaction were announced, and the pricing date, or to 75% of the closing price on the day before the pricing should either of these be above HK$0.13.

However, not surprisingly the share price adjusted downwards to the HK$0.13 level in the wake of the September announcement, making it likely that the final price will end up at or just above there, depending on the level of demand. Sources say the bookrunners will set a price range closer to the end of the bookbuilding period. The number of shares isnÆt fixed, but will vary with the final price to make up a total deal size of HK$3 billion.

The price the floor price represents a deep discount of about 69% to the HK$0.22 where the share price traded before A-max was suspended from trading in early July to prepare for this transaction. According to the first announcement in September, the floor price initially set at HK$0.18 per share, but this was adjusted downward in late October as the share price was trading at around HK$0.16, making a placement at a higher pricing somewhat difficult to pull off. At around the same time CLSA was brought in to arrange the placement.

While massive at a first glance, the discount versus the early July price is believed to be necessary to attract enough buyers given the large size of the deal. At a price of HK$0.13, A-Max will need to issue 23.08 billion new shares, which will account for 205.97% of its existing share capital, or 67.3% of the enlarged capital.

The deal is also sizeable in an absolute sense in the context of other equity or equity-linked fund raisings over the past 12 months by Hong Kong-listed companies focusing on Macau. The largest among these were a $240 million privately placed convertible bond for Galaxy in December 2006, which was arranged by JPMorgan and Merrill Lynch, and the $220 million placement that CLSA arranged for property and transport conglomerate Shun Tak Holdings in September of this year.

Because of the size, the A-Max deal will be marketed essentially like an initial public offering, complete with a two-week roadshow and seven days of bookbuilding.

The share price increased by 1.8 HK cents yesterday in connection with the start of the roadshow to close at HK$0.16. Given the low absolute price, this translated into a 12.7% gain on the day.

Assuming that A-MaxÆs existing shareholders approve the transaction and the placement pricing mechanism at an extraordinary shareholders meeting on Wednesday, the order books will open on that same day. The offer will close of November 29.
¬ Haymarket Media Limited. All rights reserved.
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