MGM China sets IPO price range at discount to Macau rivals

MGM China kicks off its institutional bookbuilding with the aim of raising up to $1.5 billion. At the same time, greenfield mining company Resourcehouse launches its IPO of up to $3.6 billion.
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MGM Macau's "Europe-inspired" <i>grande praça</i>
<div style="text-align: left;"> MGM Macau's "Europe-inspired" <i>grande praça</i> </div>

Macau casino operator MGM China yesterday kicked off the institutional marketing for its Hong Kong initial public offering, with the aim of raising between HK$9.4 billion and HK$11.7 billion ($1.2 billion to $1.5 billion).

The shares are being offered at a discount to the other Hong Kong-listed Macau casino operators, in the hope that MGM China will be able to lure investors to the deal at a time when its key comps, Wynn Macau and Sands China, have just reported record earnings. There has also been quite a lot of focus on Galaxy Entertainment in the lead up to the opening of its new Macau casino this past Sunday.

Interest for the deal is likely to be boosted by the fact that the Macau gaming industry is growing strongly at the moment. Gambling revenues increased by 43% in the first four months of this year, compared to a year earlier, and the number of visitors arriving from mainland China rose 10.3% in the first quarter. Supported by this growth, several of the other Macau casino stocks have soared to new highs in recent weeks. They did, however, see some selling pressure when MGM China hit the market yesterday, which suggests some investors are preparing to switch into the newcomer. Wynn Macau fell 4.9%, Sands China dropped 3.6% and SJM Holdings lost 2.7%. Melco Crown, which is listed in the US, fell 7.2% on Monday. By comparison, Galaxy remained relatively well supported after the successful debut of its Galaxy Macau casino resort over the weekend and gave up only 0.2%.

MGM China was set up as a 50-50 joint venture between Las Vegas-based MGM Resorts International and Pansy Ho, a daughter of Macau gambling tycoon Stanley Ho, but in the past month MGM Resorts has taken economic control of the company and will own 51% after the listing — something which should reduce earlier concerns related to Pansy Ho’s associates in Macau and mainland China.

According to sources, MGM China has signed up $190 million of commitments from four cornerstone investors, which means up to 15.8% of the deal is already covered. However, two of them — Kirk Kerkorian and Paulson & Co, the asset manager founded by US investor John Paulson — are also sizeable owners of MGM Resorts International and hence could be seen as somewhat biased in their support for the listing candidate. Kerkorian, who is investing through his private investment vehicle Tracinda, is one of the original casino moguls in Las Vegas and the man behind MGM Resorts’ rise in the casino and leisure resort industry. He currently owns about 26.8% of the company, while Paulson & Co has a 9% stake, according to Bloomberg data.

MGM China is offering 760 million new shares, which correspond to 20% of the share capital. Pansy Ho will own 29% at the time of listing, although her stake could fall to 26% if the 15% greenshoe is exercised in full, since all those shares will be secondary shares sold by her investment company Grand Paradise Macau.

The shares are marketed at a price between HK$12.36 and HK$15.34 each, which values the company at a 2011 enterprise value-to-Ebitda of 11 to 13.5 times, as per the consensus estimates by the seven joint bookrunners. This compares with a 2011 EV/Ebitda multiple of 17 for Wynn Macau and 15.6 for Sands China. SJM, which is controlled by Stanley Ho, is trading at 13.2 times, while Galaxy Entertainment is currently fetching a 2011 EV/Ebitda multiple of 17.3, all according to the average estimates tracked by Bloomberg.

MGM China is the smallest of the six casino operators in Macau in terms of market share and currently has only one casino, the MGM Macau. However, it has delivered strong profit growth during the past year and analysts argue that its global brand and US ownership makes it more similar to Wynn Macau and Sands China than to local operators SJM and Galaxy, and even to US-listed Melco Crown Entertainment, which is a joint venture between Hong Kong-listed Melco International Development and James Packer’s Australia-listed Crown Limited.

That said, MGM China, which focuses on VIP gamblers as well as the premium end of the mass market, doesn’t have the same strong profitability metrics, including revenues per table, as VIP-focused Wynn Macau does. And neither does it have the same exposure to the broader mass market, where margins are better than in the VIP segment, as Sands China — hence the need for a discount versus its bigger rivals.

MGM Macau has 427 gaming tables, 1,006 slot machines and multiple VIP and private gaming areas. The resort also includes a 35-storey hotel, 20 private luxury villas and 11 restaurants and bars. The company 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 and entertainment hub in Macau, with the aim of developing a second resort there. For more details on the company, see our earlier story published on May 11.

Aside from Kerkorian and Paulson, who will buy $75 million and $50 million worth of shares respectively, the cornerstones also include an investment vehicle owned by Asia Standard, which is buying $40 million of the shares, and a company owned by Hong Kong property tycoon Walter Kwok, which is investing $25 million. According to one source, other names could be added to the list before the launch of the Hong Kong public offering next Monday, as discussions are still continuing. The cornerstones will all be locked up for six months.

The deal will have the usual 90-10 split between institutional and retail investors and standard clawback triggers will apply to the retail tranche. The final price is expected to be fixed after the US market closes on May 26 and the trading debut is scheduled for June 3.

Bank of America Merrill Lynch, J.P. Morgan and Morgan Stanley are global coordinators for the IPO, as well as joint bookrunners together with BNP Paribas, CLSA, Deutsche Bank and Royal Bank of Scotland.

During the first part of its roadshow it is going head-to-head with Australia-based iron ore and coal miner Resourcehouse, which also kicked off its institutional roadshow yesterday. The greenfield miner, which is owned by Australian entrepreneur Clive Palmer and has the backing of several Chinese state-owned companies, has tried to launch three times earlier, including as recently as March this year, but each time it has interrupted the marketing process before getting to the actual roadshow. To give investors more time to evaluate the company now that it is finally there, the bookbuilding will last for two full weeks. It is aiming to raise between $3.3 billion and $3.6 billion pre-shoe, by selling 46% of the company.

Resourcehouse has changed bookrunners several times while attempting to list in Hong Kong. The IPO is now being arranged by BOC International, HSBC, Royal Bank of Scotland and UBS.

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