Cash-hungry American casino companies with Macau operations may take advantage of an upward bounce in the Hong Kong stock market and long-term optimism about Macau’s casino industry by floating their local operations, suggest analysts.
Given the current high pricing of debt globally set against the present rally in local stock markets, raising equity to reduce debt looks like a must-grab opportunity.
Before the global credit crisis escalated last autumn, Wynn Macau was touted for a potential USD2 billion-plus initial public offering (IPO) in Hong Kong. Wynn’s local unit arguably would present the lowest risk, if not the cheapest entry price. As the least financially-stressed of the three US-based operators currently in Macau, Wynn would be best-placed to charge a premium for its stock, but it would also be likely to have the lowest share price volatility.
Las Vegas Sands Corp. remains under pressure on its debt schedule. But the stock of the LVS parent is now showing very healthy quarter on quarter improvements in its price from a low point at the end of last year, although some day-to-day and week-to-week volatility persists. By last week, LVS’s stock had spiked at a level more than sevenfold that achieved in March. Macau accounted for 65 percent of LVS’s global earnings before interest, taxation, depreciation and amortisation (and rental) in the first quarter of 2009, according to Dow Jones.
Overall these factors should make LVS another good candidate for a local IPO. An LVS offering in Hong Kong could raise up to USD1.1 billion, according to Merrill Lynch. Reuters reported this week that Goldman Sachs has been hired by LVS to prepare plans for such a move. In the absence of a general and sustained rally in equity markets regionally and globally there would however arguably be some question marks in the short term regarding potential volatility of any local LVS stock.
As with good comedy, the secret of any successful flotation is timing—and luck in finding a receptive audience. The Hang Seng Index has risen 62 percent since March—a net gain of 41 percent on the low experienced in the first quarter of 2009. But most analysts appear to think that even in East Asia the equity markets are some way off a sustained rally. That then raises the question of how companies price any offerings. They will need to be at a rate sufficiently attractive to demonstrate inherent value for short-term capital growth—not an easy task when appealing to currently risk averse investors. At the same time the pricing must not be so attractive that it leads capital to migrate from the parent unit in Las Vegas.
Any local IPOs will also need to be priced high enough to avoid saddling the new units with under capitalised balance sheets. That would risk reprising the leveraging issues that got the US gaming industry into its current pickle.
Reuters and others have reported on speculation that MGM MIRAGE—which as of the start of this year had more than USD800 million of project debt remaining on MGM Grand Macau (not to mention about USD14 billion debt globally)—may be willing to sell its stake in that 50:50 joint venture with Pansy Ho. MGM MIRAGE is currently under pressure from New Jersey legal officials to cut its ties with Ms Ho or risk losing its Atlantic City casino licence.
Malaysian gaming group Genting has been touted as a potential suitor for MGM MIRAGE. Genting recently bought USD100 million worth of debt in MGM MIRAGE and has previously explored opportunities for investment in Macau via its subsidiary Star Cruises. Genting also recently acquired a 3.2 percent stake in MGM, and issued USD425 million worth of equity in Genting Singapore ahead of the opening early next year of the company’s integrated Singapore gaming property Resorts World at Sentosa. Two and two doesn’t however always equal four in the investment world, as previous experience has shown.
“What I think is driving the speculation at this moment is the financial distress that a lot of the parent organisations standing behind some of the assets in this market are facing,” Adam Rosenberg, Managing Director, Global Head of Gaming Group for Goldman Sachs & Co., told a conference session at G2E Asia last week.
“As they’ve said, they’re considering all alternatives to deal with their operational and financial situations,” added Mr Rosenberg.
“The capital markets are presenting an opportunity,” added Andrew Zarnett, Managing Director at Deutsche Bank Securities, during the same session.
“It’s temporarily open, which means there’s something to be done,” stated Mr Zarnett.
