Melco Crown Philippines prices follow-on at the top

This allows the company to raise $337 million towards the casino project it is developing together with the SM Group.
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An artist's rendering of Entertainment City in Manila
<div style="text-align: left;"> An artist's rendering of Entertainment City in Manila </div>

Melco Crown (Philippines) Resorts Corp will raise at least Ps13.74 billion ($337 million) from its fully marketed top-up placement after fixing the price at Ps 14 per share — the top of the indicated range.

If the 12% overallotment option is exercised in full, the deal size could increase to $377 million. The money will be used mostly towards the $1 billion casino project in Manila’s new Entertainment City gaming hub that the Philippine gaming unit of Macau casino operator Melco Crown Entertainment is developing together with three local partners.

The top-end pricing was no great surprise after sources said the deal had attracted strong demand, particularly from international accounts. According to one banker, it was about 5.5 times covered at the top of the range and almost eight times overall. Close to 150 investors participated in the transaction, which was more than for the fully marketed follow-on in LT Group that was more than twice the size.

LT Group, which priced its $792 million offering last week, said in a statement that the deal had attracted more than 130 institutional accounts.

The interest for Melco Crown was particularly strong out of the US, which is home to a lot of investors who focus on and understand the dynamics of the gaming sector. There was also good support from investors who are already shareholders in Melco Crown Entertainment, which is listed both in the US and Hong Kong. The parent company owns 69.6% of the Philippine unit following the top-up placement.

Demand from domestic investors was said to be okay, but not spectacular. All the key names did participate, according to one source, but order sizes were smaller than what one might have expected. One reason for that is likely to have been valuation.

The top end of the price range values Melco Crown at an enterprise value-to-Ebitda (EV/Ebitda) multiple of 11.7 times for 2014 and 10.6 times for 2015. When the bookbuilding started on April 15 that put the company at a discount to Bloomberry Resorts, which is one of the four holders of a licence to operate an integrated casino resort in Entertainment City.

However, Bloomberry’s share price has fallen 12.8% during the marketing of Melco Crown, erasing almost the entire implied discount. As of yesterday, Bloomberry was quoted at a 2014 EV/Ebitda multiple of 11.9 times, according to Bloomberg data, compared to 13 times just over a week ago.

The drop in the share price has come despite a 2.2% gain the benchmark Philippine index in the same period, suggesting that some investors may have been switching out of Bloomberry in order to buy Melco Crown instead. Bloomberry, which is controlled by Philippine businessman Enrique Razon, has gained 62% since it raised $209 million in early May last year. That deal was its first share sale following a reverse takeover late in 2011 and marked the first time international investors were given an opportunity to gain direct exposure to the expected growth in the Philippine gaming industry.

Bloomberry became the first of the four Entertainment City licence holders to start operations when it opened the doors to phase one of its Solaire Manila resort on March 16 this year, and hence the first to offer international-style gaming in the Philippines.

The casino resort that Melco Crown is developing together with the SM Group, is scheduled to open in mid-2014 and 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. The other two licence holders are due to follow suit in 2015 and 2016.

Together the four resorts are expected to boost the growth of the Philippine gaming sector, 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.

Melco Crown sold approximately 981.2 million new shares as part of the base deal, which is equal to about 22.3% of the enlarged share capital. The deal was done as a top-up placement, which means the parent company first sold existing shares to other investors and then bought the same number of new shares from the issuer at the same price to ensure all the proceeds from the deal will end up with Melco Crown.

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. It 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.

The research report forecasts that Melco Crown’s share of Ebitda before rental payments will reach Ps4 billion in 2014 and Ps9 billion in 2015.

There is huge investor interest in the Philippines at the moment and the country’s stock market is the best performing market in Asia with a 20.3% gain year-to-date. Thailand is second with 19.3%, while Indonesia and Japan are neck-and-neck with a gain just above 14% so far.

LT Group has risen 12.9% from the follow-on price in the past week and said yesterday that UBS, which was the sole bookrunner for the deal, has exercised the overallotment option in full, increasing the deal size to about $910 million.

Not surprisingly, other Philippine issuers are lining up to take advantage of the demand and tap the equity market. Yesterday, the Wall Street Journal reported that Travellers International Hotel Group is seeking to raise about $500 million from an IPO of its Resorts World Manila casino, which opened in October 2009 but is not part of the new gaming hub in Entertainment City.

Travellers, which is a 50-50 joint venture between the Alliance Global Group of the Philippines and Genting Hong Kong, is aiming to break ground for its new Resorts World Bayshore project in Entertainment City sometime this year, however, and like Bloomberry and Melco Crown it is expected to need to raise equity for that project.

In a statement to the Philippine Stock Exchange, Alliance Global said it wished “to clarify that Travellers International Hotel Group is looking at various financing alternatives for its projects both in the equity and debt markets.” It neither confirmed nor denied the media report about the IPO, however.

Sources said later in the day, though, that Alliance and Genting had mandated five banks for an IPO later this year. The five are said to be Bank of America Merrill Lynch, CIMB, Maybank, Religare and UBS, although none of the banks were able to confirm that as of last night.

Meanwhile, Asia United Bank, a Philippine commercial bank owned by a group of local industrialists, is planning to start the roadshow for an IPO of about $150 million either late this week or early next week. It will be brought to market by Credit Suisse and UBS.

Melco Crown’s follow-on was arranged by Citi and UBS.

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