Genting launches $1.42 billion rights issue

In a choppy market, the Malaysian casino operator offers a hefty discount to its traded price to entice investors.
Volatile global markets and a particularly bearish Singapore market has not deterred Genting International, the Singapore-listed casino operator, from announcing a mega-rights issue worth S$2.2 billion ($1.42 billion).

Investors around the world have continued to display nervousness as bad news relating to the subprime situation in the US continues to cause shock waves. The Singapore Straits Times Index lost around 5% over the last two weeks and 3.35% yesterday to close at 3,273. But Genting still decided to proceed with its plans to approach existing shareholders for further equity.

The casino operator is offering 3.6 billion shares, or 37.5% of the enlarged share capital, at S$0.60 apiece. The price represents a 21% discount to yesterdayÆs closing price of S$0.76. Shareholders will be entitled to three shares for every five shares held. Genting Berhad owns 58% of Genting International, while 31% is free float.

Analysts commented that given the significant discount to market price at which the rights are being offered, existing shareholders are likely to pick up their entitlement, despite adverse market sentiment.

ôInvestors who hold Genting shares are buying into the future of the company, especially because the Singapore casino project is projected to add significantly to cash flows,ö comments a source. ôThus, shareholders are likely to pick up the shares they are being offered, especially as the price is very attractive relative to prevailing market price.ö

Singapore legalised casino gambling in 2005, in a move widely seen as an effort to emulate Macau's success in attracting visitors. The first contract to build a casino (for which Genting also bid and lost) was awarded to Las Vegas Sands.

Genting won the second project to be awarded. It will build and operate Resorts World at Sentosa, with Star Cruises as a partner in the development. Resorts World will include the regionÆs first Universal Studios theme park, other theme parks, museums and six hotels. It is projected to attract 10 million customers when it opens in 2010.

Both licenses were hotly contested as the government has said it may not award another license for a decade. Genting out-bid Las Vegas-based Eighth Wonder, bidding in consortium with James PackerÆs PBL and Melco, and Kerzner International, who bid with SingaporeÆs CapitaLand to win the license.

ôGenting could be bound by a fund-raising timetable,ö says a banker, explaining why the Malaysian company may have announced such a large rights issue in an unpredictable market. ôProgress at the Sentosa site is proceeding quickly and Genting may need to raise money to finance the next phase. Given how intense the competition for this project was, Genting will want to ensure it meets the commitments it made to Singapore.ö

Genting is going to spent 55% of the net proceeds raised via the rights issue to develop the Sentosa resort, while approximately 24% will be used for repaying loans for acquiring Stanley Leisure (now called Genting Stanley) in 2006. Resorts World will cost in aggregate around S$5.2 billion. Post the rights issue Genting will have raised about S$3.2 billion of the entire cost by way of equity and analysts expect the balance to be debt funded.

Genting launched its initial public offering of 800 million shares in December 2005 and attracted substantial demand from both retail and institutional investors with S$2.29 billion worth of orders. Investors like Prudential and Fidelity were among the 150 institutions who bought shares. DBS was the global co-ordinator for the IPO and CIMB-GK Securities, CLSA and Merrill Lynch were bookrunners.

The share price of the casino operator had gained significantly earlier this year after the company announced it had won the Sentosa project and its 52-week high is S$1.20.

On August 14, Genting reported uninspiring second quarter results with revenues falling to S$192.6 million, 1.8% lower quarter-on-quarter. It also posted a loss of S$54 million, versus a profit of S$68 million in the first quarter. Management attributed the poor second quarter performance to higher gaming taxes in the UK and losses suffered in a land option.

An OCBC Investment research update released the same day said, ôWe see limited upside from the current trading range and we thus maintain our hold recommendationö. OCBC noted that the investment thesis for Genting "remains its ability to win more concessions for integrated resorts".

Genting has not released details of advisors for the issue. Bankers are speculating that CIMB will play a leading role but the Malaysian bank told FinanceAsia in a conversation yesterday that it was premature for any comment.

OCBC calculates a fair value estimate of Genting at S$0.86. If investors agree with the OCBC assessment, the Genting issue should sail through at the proposed S$0.60 per share price. But the variable that cannot be factored in at the moment is what the spillover effect of the subprime situation will be in Asia. Genting may be keeping its options on lead managers for the rights issue open, to enable it to figure out exactly what kind of commitments it will need from its advisors.
¬ Haymarket Media Limited. All rights reserved.
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