The proposed acquisition and possible backdoor listing of Suncity Group made a splash that rippled through Macau’s gaming industry. But does the deal add up to more transparency or less?
The new year had barely begun before Macau’s gaming industry produced its first big story. And the story had barely broken before questions were being asked about the deal’s opacity.
In early January, International Entertainment Corporation, controlled by Hong Kong’s Cheng family, whose patriarch, Cheng Yu Tung, is Asia’s fourth-richest man, agreed to pay HK$7.35 billion (approximately US$950 million) for a 70% stake of Suncity Group Ltd.
The deal is seen as a way for IEC to gain exposure to the coveted Macau gaming sector given the lack of new license opportunities. Approximately two-thirds of revenue is generated by the VIP segment, in which junket operators are the main players (see following VIP Gaming: The Financial Model).
According to Grant Govertsen, a managing partner at Union Gaming Group in Macau, the takeover is dependent on four conditions: first, that Suncity generates at least HK$1.5 billion in EBITDA in 2013; second, that Suncity generates at least HK$1.68 trillion in rolling chip volume in each of 2014 and 2015; third, that Suncity operates at least 280 gaming tables; and fourth, that Suncity has access to HK$12 billion in available credit from casino operators, junket collaborators and third-party financiers.
In a report, Mr Govertsen compared the acquisition favorably with practices in Las Vegas. “[We] are seeing more and more Macau gaming related entities embrace the concept of having publicly traded equity. We would argue that this should have a longer-term positive impact—at least with respect to the industry’s reputation— as having publicly traded equity requires an increased level of transparency and an increased level of oversight.”
However, others were less sanguine. The Wall Street Journal raised questions over exactly what IEC would be buying. “It is unclear which of Suncity Group’s assets are under the control of Suncity International Holdings Ltd., the entity in which International Entertainment said it might invest,” the WSJ pointed out.
Further, while Hong Kong’s securities and exchange operators would not comment specifically on the deal, the WSJ noted both a previous investigation of IEC’s shareholding structure and criticism of the deal’s structure.
On the former, the WSJ quoted the Hong Kong Securities and Futures Regulator’s 16th October, 2013 opinion that investors should “exercise extreme caution when dealing in the shares” given the ownership of most shares by a small group.
On the latter, the WSJ noted IEC would likely fund the deal partly through issuance of securities to Suncity, given that it held only HK$1.36 billion in bank balances and cash on hand, according to its 30th September filing. This could enable Suncity to effectively control IEC through a reverse takeover and in turn to gain a backdoor listing in Hong Kong.
Mr Govertsen also noted the backdoor listing angle, while flagging the possibility of an exit for Suncity founder Alvin Chau while multiples were at historical highs.
Key Players
The Cheng family, headed by Cheng Yu Tung, controls Chow Tai Fook Enterprises Ltd, which is active in several sectors, notably as the major shareholder of property developer New World Development Co Ltd. Mr Cheng himself has also owned 10% of Stanley Ho’s STDM since 1982, so is no stranger to Macau gaming.
As the press was quick to note, the deal would see Mr Cheng and Mr Ho, who are longtime friends, more closely involved financially as well as raising the level of ownership concentration in the industry.
Suncity, headed by Alvin Chau, is the largest of the roughly 200 junket operators in Macau. The company began with a VIP club at StarWorld in 2007 and, as of September 2013, had parlayed this into 17 VIP clubs with 285 tables and an average monthly rolling chip volume of around HK$135 billion.
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Much of this has been driven by the vigor of Mr Chau, whose aggressive growth orientation is matched with prudence in extending credit, enabling the company to avoid the liquidity problems encountered by some of its competitors.
The company has been an innovator in its field, one example being its Suncity card, a loyalty card that earns customers points redeemable on retail, dining and entertainment purchases around Macau as well as giving them access to their gaming records and the spending and credit amounts to which they are entitled at gaming venues.
Suncity is also a leader in pursuing opportunities outside gaming, its interests stretching to finance, real estate, entertainment, natural resources, food and beverage, tourism, media and luxury products and services.
