By Ben Blaschke
Melco International Development Limited is set to launch an Initial Public Offering of Studio City International Holdings – the holding company for the Studio City property in Macau.
In a filing overnight, Melco International said that on 14 August it had submitted to the US Securities Exchange a draft registration statement for a possible IPO in the US of American Depositary Shares representing ordinary shares of Studio City, with the number and dollar amount proposed to be offered and sold yet to be determined.
Studio City is 60% owned by Melco Resorts which in turn is 51.2% owned by Melco International. The company also intends to spin-off New Cotai, the privately owned investment firm that owns the other 40% of Studio City International Holdings.
“Following completion of the proposed spin-off, the company’s interest in Studio City will be reduced although it is intended that the company will remain as Studio City’s majority shareholder after the IPO,” Melco International said.
The IPO is far from guaranteed to proceed, with Melco International applying for a waiver from the Hong Kong Stock Exchange from strict compliance with listing rules which state that, after the listing of the entity to be spun off (New Cotai), Melco International must retain a sufficient level of operations and sufficient assets to support its separate listing status.
The company noted that its remaining business after the proposed Spin-off excludes Melco Resorts and Studio City and that it would therefore not satisfy the “profit test, market capitalization/revenue test or market capitalization/revenue/cash flow test” under listing rules.
It is not yet known the motives behind the proposed IPO and spin-off, although analysts Vitaly Umansky and Zhen Gong from brokerage Sanford C Bernstein believe it could be due to New Cotai intending to sell its 40% stake and seeking a valuation.
“The IPO filing allows banks/company to approach investors to gauge interest,” they said. “If a valuation is palatable, New Cotai may be willing to sell secondary shares in the IPO. Alternatively, Melco may be willing to pay a similar price to acquire New Cotai’s interest.”
A second possibility is that Melco may be feeling some pressure to commence Phase 2 of Studio City but that New Cotai may be reluctant to invest any further capital.
“An IPO process may be way to set a valuation – either to actually raise new capital that dilutes New Cotai or to get a view on third party valuation and have Melco dilute New Cotai,” they prophesized.
“The IPO, if it were to happen, does not make much sense to us at this stage (from the perspective of Melco). It further creates complexity for Melco, a company which is already complicated by Macau standards.
“At this stage, we do not foresee Studio City receiving an adequate valuation based on the property’s current performance and structure. If it were to go ahead, the pricing would be at a substantial discount to Melco valuation in our view.”
Chairman and CEO of Melco Resorts and Melco International, Mr Lawrence Ho, told Inside Asian Gaming in June that it would be difficult for the company to buy out its Studio City partner.
“We’ve worked with New Cotai for six years now,” he said in an exclusive interview. “It’s clear that those guys are very smart and very good at what they do. They’re distressed debt guys so there’s never going to be a scenario where we can take advantage and try to take them out at below market value.
“For us and New Cotai, the two sides can’t even agree on what’s fair market. We can always have a conversation, but our view is, for now, let’s just focus on operating the business as efficiently and as well as possible. If we do buy them out at a higher valuation somewhere down the road, so be it.”
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