The extended deal is of huge significance for A-Max as it will transform the former manufacturer of liquid crystal displays from being a largely passive investor in the Greek Mythology casino into the single largest junket operator in Macau with a 46% share of the VIP market. The actual junket operations will be carried out by an independent company called AMA, but A-Max will gain access to 80% of the revenues generated by this entity through a profit transfer agreement. Industry observers estimate that A-Max will collect a margin of at least 1.4% from this business, which should make it a very profitable company.
The deal also promises to be highly lucrative for Melco PBL Entertainment (Macau), whose Crown Macau casino will be at the receiving end of A-Max and AMAÆs new business. And investors seemed to recognise this as they pushed Nasdaq-listed Melco PBLÆs share price more than 10% higher at one point last night when news emerged that A-Max had been able to raise the cash it needed. Melco PBL holds one of MacauÆs six gaming licenses and sub-licences.
While there was always a lot of interest in this transaction, it initially turned out investors werenÆt actually that eager to commit money to the deal û perhaps because it came too close to year end in jittery markets and perhaps because of the sheer size of it. Indeed, the CLSA-led placement will more than double A-MaxÆs current market cap of about $200 million.
Having failed to raise the HK$3 billion that it originally sought when the books closed after seven days of bookbuilding last Friday, A-Max and CLSA re-launched the placement at a smaller size of HK$2 billion on Monday. And this time investors were more accepting. In the less than 24 hours that the deal was open about 30 investors committed the necessary capital. According to the source, about 75% of the money came from long-only funds while hedge funds provided the rest.
The price was fixed at HK$0.13 per share, which was no real surprise given that the share price had been trading close to this level ever since the company announced that this would be the floor price. The price equalled a discount of 6.9% versus yesterdayÆs closing price of HK$0.139 which is not bad when you consider that the current share capital will be diluted by 57% as a result of this transaction.
Looking at the price in relation to where A-Max traded before it was suspended in early July to prepare for this transaction, the discount is a much deeper 69%. A-Max will need to issue about 15.4 billion new shares to cover the deal, based on the final per share price of HK$0.13.
What may have won some investors over after the deal was downsized was the increased commitment by Melco PBL, which was clear evidence of the value it hopes to extract from the new business. Essentially, the Crown Macau will now pay AMAÆs junket operators who bring VIP clients to its casino on a daily basis rather than once a month. This will reduce AMAÆs need for working capital by about HK$1 billion and make sure that the business wonÆt be hampered by the fact that the fund raising turned out to be smaller than originally planned, a source said earlier this week.
The money raised by A-Max will be lent to a company called Ace High which in turn will provide it to AMA. A-Max will gain a 99.99% stake in ACE by capitalising HK$50 million of the loan, which is how it will get its hands on 80% of the profits from this new business. 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.
AMA will use the money to provide daily liquidity to nine junket collaborators who have agreed to bring their high-roller VIP clients exclusively to the Crown Macau.
The daily commissions will effectively allow the collaborators to provide more funding to their high-roller clients who can then spend more at the tables. According to the source, the liquidity could increase by as much as 28%-35%, which is why market watchers have suggested that this deal has the potential of transforming the entire business model for the VIP segment in Macau. Under the structure currently used in Macau, the junket collaborators only get paid on the seventh day of the month after they have earned the commission, which could potentially be up to 36-37 days later.
Based on the current turnover of the nine collaborators, AMA will provide about HK$80 billion ($10.2 billion) in monthly rolling chip volume at the Crown. Together with Melco PBLÆs daily commission payments, the HK$2 billion loan will cover the working capital at 100 VIP tables, according to earlier statements by A-Max.
In a brief note issued last night, Deutsche BankÆs gaming analyst Bill Lerner said the deal is a significant catalyst for Melco PBL.
ôNot only has there been downward pressure on (Melco PBLÆs) shares due to speculation that A-Max might not get funded, but now that it has successfully been funded the result should be transformationally positive,ö he said.
But while this new business model with the payout of the daily commissions is likely to be copied by other casino owners and junket operators, A-Max and the Crown will have a significant first-mover advantage given that they will control more than 40% of the VIP revenue.
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.