MGM China raises $1.5 billion ahead of Hong Kong listing

Macau's smallest casino operator prices its offering at the top of the range, while Nobao calls off its second US IPO attempt and Kazakhmys decides not to issue any new shares in its upcoming Hong Kong listing.
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Photo: AFP</div>
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MGM China, which is one of six casino operators in Macau, will raise HK$11.7 billion ($1.5 billion) from its initial public offering in Hong Kong after fixing the price at the top of the range.

The deal attracted a lot of attention from investors in both the US and Asia following sharp gains in Macau gaming revenues during the first four months of this year, while a rally in several of its local casino peers meant MGM China’s valuation got less demanding in the run up to pricing.

When the deal closed on Thursday last week, more than 500 institutional investors had submitted orders and Hong Kong retail investors had subscribed for 21 times the number of shares earmarked for them. However, several other Hong Kong IPOs this year have attracted a similarly positive response and have still struggled to perform in the secondary market, so the real test will come when MGM China starts to trade on Friday.

The company, which is controlled by Las Vegas-based MGM Resorts International, sold 20% of its enlarged share capital in the form of 760 million new shares. The price was set at HK$15.34 per share after being offered in a range between HK$12.36 and HK$15.34.

The final price values the company at an enterprise value-to-Ebitda multiple of 13.5 times, which at the start of the roadshow marked a slight discount to its Hong Kong listed rivals. However, during the seven-day roadshow, most of them rallied and the discount widened substantially. As of Thursday last week, Wynn Macau was trading at 19 times this year’s estimated earnings compared to 17 times seven days earlier, according to Bloomberg data. Galaxy Entertainment, which has just opened a new casino in Macau, had risen to 19.8 times from 17.3 times and SJM, which is controlled by Macau gambling tycoon Stanley Ho, had increased to 14.5 times from 13.2 times. And while underperforming the sector, Sands China had improved to a 2011 PE multiple of 16 times from 15.6 times.

As a result, MGM China looked relatively more attractive, which would have contributed to it being able to push the price to the top of the range. At the bottom of the range, MGM China was valued at 11 times this year’s earnings.

The Macau casino operators have been gaining since the government announced earlier this month that gambling revenues increased by 43% in the first four months of this year versus a year earlier following another record month in April when revenues reached 20.51 billion Macau patacas ($2.5 billion). That came 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.

However, sources also noted that there was active short selling in some of its peers just before and in the first few days of MGM China’s roadshow, which was reversed when investors realised they might not get as big an allocation of the market newcomer as they had expected. This seems to have caused a bit of a squeeze on the final day. During the roadshow as a whole, Wynn Macau was up 5.3%, Galaxy Entertainment 15.4%, SJM 9.1% and Melco Crown, which is listed in the US, gained 9.4%. Sands China added a modest 1%.

There was no information on the final demand from institutional investors, although it is said to have exceeded 10 times. Meanwhile, the level of retail subscription triggered a clawback that increased the size of the retail tranche to 30% of the total deal from 10%. This meant the number of shares available for institutional investors was reduced by the same amount. Excluding the $190 million worth of shares bought by four cornerstone investors, the final deal size targeted at institutional investors amounted to $860 million.

The demand was Asia-heavy, but there was also good follow-through from US funds that were already familiar with the US-listed parent company. The buyers included Asian regional funds, gaming specialists based both in Asia and the US, as well as hedge funds and the usual local corporations and tycoons.

The cornerstones include Kirk Kerkorian, one of the original casino moguls in Las Vegas and the man behind MGM Resorts’ rise in the casino and leisure-resort industry, who bought $75 million worth of shares, and Paulson & Co, the asset manager founded by US investor John Paulson, which invested $50 million. Kerkorian owns 26.8% of MGM Resorts, while Paulson & Co has a 9% stake, according to Bloomberg data.

Meanwhile, an investment vehicle owned by Asia Standard bought $40 million worth of shares and a company owned by Hong Kong property tycoon Walter Kwok took $25 million worth.

MGM Resorts International and Pansy Ho, a daughter of Stanley Ho, created MGM China as a 50-50 joint venture. However, in April, MGM Resorts took economic control of the company and it will own 51% after the listing. Pansy Ho will own 29%, although her stake could fall to 26% if the 15% greenshoe is exercised in full. The money raised from the IPO will be used to reimburse Pansy Ho for the stake she is giving up as a result of the restructuring. As chairman of the company, she will continue to have a lot of influence, however.

MGM China is the smallest of Macau’s six casino operators and currently has only one casino, MGM Macau, which focuses on VIP gamblers and the premium end of the mass market. However, the company has submitted an application to the Macau government for the right to lease a parcel of land on the Cotai Strip, the city’s new gambling and entertainment hub, with the aim of developing a second resort there.

At $1.5 billion, this is the fourth-biggest gaming IPO globally. The largest was Sands China’s $2.5 billion Hong Kong listing in November 2009. It is also the third-biggest IPO in Hong Kong so far this year after Shanghai Pharmaceutical and the renminbi-denominated Hui Xien Reit, which raised $2 billion and $1.6 billion respectively. Those two stocks are currently trading 0.6% and 8.2% below their IPO prices as the follow-through buying of market newcomers in the secondary market remains quite poor.

Nobao Renewable Energy

The challenging IPO market also put a spanner in the works for Nobao Renewable Energy Holdings this past week. The Chinese company, which provides energy management solutions using ground source heat pumps, was seeking to raise up to $145.6 million from its second attempt at a US IPO, but scrapped the deal ahead of the pricing on Thursday.

In a brief statement filed with the US SEC, the company cited the general market conditions as a reason for the withdrawal. Sources said it had been difficult to get investors to look at the deal in the wake of over-hyped internet listings from LinkedIn and Russian search engine Yandex. Others noted that Nobao’s complicated accounting also put investors off. The deal was arranged by Citi, Deutsche Bank, Goldman Sachs and UBS.

Meanwhile, Kazakhstan-based natural resources group Kazakhmys has decided not to pursue its Hong Kong IPO after one week of investor education. The company, which is already listed in Kazakhstan and London, was expected to raise between $200 million and $300 million through an offering arranged by China International Capital Corp, Citi and J.P. Morgan. However, on Friday the company said in a statement that it will list in Hong Kong by way of introduction only. “Issuing new shares at current share price levels would not create value for existing shareholders,” it said.

It added though that a listing in Hong Kong is “important for the strategic development of Kazakhmys” and it might consider issuing some shares into the Hong Kong market at a later date, to assist liquidity. “Any future issuance will depend upon share price levels and capital requirements, particularly as the major growth projects at Aktogay and Bozshakol move forward,” it said. Kazakhmys is the largest copper producer in its home country and also active in gold, zinc and silver mining as well as power generation and petroleum. It intends to complete the listing by the end of June, which will make it the first publicly traded company from Kazakhstan in Hong Kong.

MGM China’s IPO was arranged by Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley as global coordinators, together with joint bookrunners BNP Paribas, CLSA, Deutsche Bank and Royal Bank of Scotland.

¬ Haymarket Media Limited. All rights reserved.
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