MGM China, the Macau casino operator that was set up as a joint venture between Las Vegas-based MGM Resorts International and Pansy Ho, has started pre-marketing of an initial public offering that could raise between $1 billion and $1.5 billion, according to sources. The aim is to list in Hong Kong by early June.
Initially planned for 2010, the timing of the offering couldn’t have been better as it follows another record month for gambling revenues in Macau, which has helped push the share prices of other Macau casino operators to new highs. Government statistics released last week showed a 45% rise in gambling revenues in April to 20.51 billion Macau patacas ($2.5 billion) versus the same month last year, which brings the year-on-year revenue increase in the first four months of 2011 to 43%. This comes on the back of a 58% increase in gambling revenues in 2010 and puts the former Portuguese colony on track to rake in five times as much money from its casino tables this year as the Las Vegas Strip did in 2010.
Last month, MGM China also implemented a restructuring that will see MGM Resorts take control of the joint venture through an increase of its stake to 51% from 50%. Pansy Ho’s stake will fall from 50% to 29%, while 20% will be sold to public shareholders through the IPO. The restructuring will allow MGM Resorts to benefit more directly from the rapid growth of the casino market in Macau and will ease the long-term concerns about Ho’s relationship with and alleged dependence on her father, Macau gambling tycoon Stanley Ho, as well as some of her associates in Macau and mainland China.
The announcement comes on the back of a highly publicised feud within the Ho family earlier this year, which saw the ailing Stanley Ho accuse the children of his second wife, including Pansy Ho, of colluding with his third wife to steal a company that controls the bulk of his multi-billion dollar empire. They denied the accusations and after a multitude of contradictory statements from both sides and a lawsuit issued by Stanley Ho, the dispute was eventually resolved, with the tycoon retaining control of his assets.
In a preliminary prospectus, MGM China noted that Pansy Ho was responsible for securing the sub-concession under which the company operates its casino business and has played a significant role in the development of the business before and after the opening of its MGM Macau integrated casino resort in 2007. And irrespective of her reduced economic holdings, Ho will continue in much the same role, allowing the company to benefit from her “experience in and knowledge of the Macau market, her relationships in the Greater China region and her general business skills, particularly in the areas of strategy, design and marketing.” Ho will also be chairman of the Hong Kong-listed unit.
Sources say the investor interest in the IPO so far has been good and there is expected to be significant support when the bookbuilding starts on May 17. It isn’t clear yet whether that support will come in the form of cornerstone investors or anchors as discussions are still ongoing, but, according to the sources, there are several names ready to submit orders. The key difference between the two types of investors is that anchors don’t have to commit to a lockup and don’t have to be publicly disclosed.
Analysts argue that MGM China is a good opportunity for investors to gain exposure to the Macau gaming market at a discount, and note that the large size of the IPO should ensure that the stock remains liquid. However, the ultimate demand will depend on the valuation and whether investors agree with the upbeat revenue forecasts for the casino market in Macau, which are primarily driven by expectations of a continued strong inflow of visitors from mainland China.
MGM China is the smallest of the six casino operators in Macau in terms of market share – at present it only has one casino – but has delivered strong profit growth in the past year. The key comparables are expected to be Wynn Macau and Sands China, which are also controlled by US-based companies and are viewed as the key drivers of the development of Macau from a casino monopoly into a highly competitive entertainment hub that has taken place in the past five years.
MGM China’s focus on the VIP and premium mass market segments makes it more similar to Wynn Macau, but it doesn’t have the same strong profitability metrics, such as revenues per table, that Wynn does. At the same time, MGM China doesn’t have the same broad mass market exposure as Sands China. Hence, it is expected to come at a discount to both these companies.
Wynn Macau and Sands China both listed in Hong Kong at the end of 2009 and have risen 157% and 106% since their respective trading debuts. Wynn Macau is currently trading at a 2011 enterprise value-to-Ebitda of 18.1 times and at a price-to-earnings ratio of 22.6 times for the same year. Sands China current market price implies an EV/Ebitda multiple of 16.4 and a P/E multiple of 24.8, according to Bloomberg data.
One syndicate report estimates MGM China will generate an Ebitda of about $600 million this year, while the company itself projects a net profit of no less than HK$1.45 billion ($187 million) in the first six months this year. In 2010, it posted a 140% increase in adjusted Ebitda on the back of a 62.7% increase in casino revenues. This allowed the company to turn the net loss of HK$167.1 million in 2009 into a net profit of HK$1.57 billion in 2010.
The size of the offering is based on analyst estimates of a fair equity value of up to $8.7 billion and the fact that it will sell 20% of the share capital (this could increase to 23% if the 15% greenshoe is exercised). That implies a potential fair value of $1.7 billion for the stake that is up for sale, which would come down to about $1.5 billion after applying an IPO discount.
In the preliminary prospectus, MGM said it had an approximate market share of 11.4% in 2010, based on revenues at the 33 casinos in Macau. In addition to its existing MGM Macau resort, it has submitted an application to the Macau government for the right to lease a parcel of land on the Cotai Strip, which is the new gambling hub in Macau, with the aim of developing a second resort there. MGM Macau, which is connected to the One Central luxury retail complex and the Mandarin Oriental hotel, has 427 gaming tables, 1,006 slot machines and multiple VIP and private gaming areas. The resort, also includes a 35-story hotel, 20 private luxury villas and 11 restaurants and bars.
The institutional bookbuilding will start on Tuesday next week, while the Hong Kong retail offering will launch on May 23. The final price will be determined after the close of US trading on May 26 and the trading debut is scheduled for June 2 or 3.
The IPO is being arranged by Bank of America Merrill Lynch, BNP Paribas, CLSA, Deutsche Bank, J.P. Morgan, Morgan Stanley and Royal Bank of Scotland.