IPO of MGM China this quarter?

MGM China, a new company

Last Wednesday MGM filed an 8k describing the formation of a new company, MGM China, which will be the listing vehicle for the Macau casino properties now held in a 50/50 joint venture by MGM and Pansy Ho.  Each will initially own 50% of MGM China.

an intended IPO

MGM and Ms. Ho intend to sell 20% of MGM China to the public in Hong Kong in an IPO that press reports say will happen next month.  The 8k notes that the parties will use their best efforts so see the IPO occurs before June 30th.

a secondary offering

The IPO will be a secondary offering, meaning no new shares will be created; rather the present owners will sell some of their existing shares.

all shares to be sold by Ms. Ho

The post-IPO ownership structure of MGM China will be somewhat of a change, though, because all the stock being sold to the public will come out of Ms. Ho’s portion.  In addition, Ms. Ho will sell another 1% of MGM China to MGM at the IPO price, giving MGM 51% ownership and clear control.  The underwriters of the issue will have an “overallotment” of 3%, meaning they have permission to sell up to 23% of the company.

post-IPO structure

Depending on the overallotment, the post-IPO structure of MGM China will be:

MGM     51%

Pansy Ho     26%-29%

the public     20%-23%.

One potential sticking point might have been that none of the money raised goes to cash-strapped MGM.  Ms. Ho has addressed this issue by agreeing to use US$311 million of the IPO proceeds to buy MGM convertible bonds.

The IPO will be coming at a good time

The Macau gambling market is booming, with revenues through the first three months of 2011 running over 40% higher than in 2010.  And so are the Hong Kong-listed gaming stocks.  Market leader SJM (0880) is up 35% year to date, Wynn Macau (1128) has gained 58% and Sands China (1928) is 26% higher.

The IPO solves a problem for Pansy Ho

The offering documents will doubtless make the situation clearer, but press reports say Ms. Ho resigned from the board of directors of the Macau joint venture at the end of last year.  I presume this was to allow her to vie for control of the much larger SJM, the flagship of the Ho family gambling empire, that has recently been taken out of the hands of Ms. Ho’s father, Stanley.  Macau law prohibits one person from controlling two gambling concessions.  Her reduced holding in MGM China may be sufficient evidence that Ms. Ho is a passive investor in the firm for authorities to allow her to become chairman of SJM.

One other plus:  MGM has agreed to explore co-investing in property on the mainland with Ms. Ho.

How will Hong Kong investors value MGM China?

I find this a hard one to figure.  As the recent performance of  1128 and 1928 suggest, I think Hong Kong investors are beginning to understand the value of the American casino operation model.  But I have no idea if the market will regard the withdrawal of Ms. Ho from MGM China as a plus or a minus (my guess is that it will be the latter).  At this point, I’d expect the IPO will raise well over US$1 billion, US$2 billion a possibility.  The offering documents, and the May report of the Macau Gaming Coordination and Inspection Bureau on gambling receipts, will make the situation clearer.

MGM’s stock went up 8% on the IPO announcement.

One reason is doubtless the US$300+ million cash infusion.  Another is that MGM gains control of MGM China.  More important, I think, is the tendency of the Las Vegas-Macau casino conglomerates to trade on the value of their listed Macau operations.  For example, WYNN’s holding in 1128 represents 75% of the parent’s market capitalization.  Establishing more firmly what MGM’s Macau interests are worth will likely give the parent stock more speculative appeal.

My very preliminary take is that a $14 MGM price already discounts a $2 billion IPO.  At the same time, this would make it clear that you’re only paying $3.50 or so for the rest of MGM, making the stock look like a turbo-charged warrant on improvement in the Las Vegas market.

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