MGM China’s IPO in Hong Kong

the IPO details

According to Bloomberg, details, including pricing, for the IPO of MGM China, have been set.  MGM China is currently a 50/50 joint venture between MGM Resorts International and Pansy Ho, daughter of Stanley Ho.   The stock is going to debut on the Hong Kong Stock Exchange–presumably next week–through a secondary offering of 760 million shares by Ms. Ho.  The IPO price will be set by underwriters at between HK$12.36 and HK$15.34.

If we assume that the high end of the range represents a 20x multiple on expected 2011 earnings per share, which is where I view Wynn Macau as trading today, that would mean MGM China could earn HK$.75-HK$.80 this year.

timing of the offer is very favorable

The Macau gaming market is booming.  The publicly traded stocks have been exceptionally strong performers, year to date.

the IPO means cash for Pansy Ho, not MGM

In this respect, the offering is different from the listings of WYNN’s and LVS’s Macau gambling subsidiaries, where the shares sold in the offering came from the US-based parent.

a bit of history

Stanley Ho, Pansy’s father, controlled the monopoly casino company in Macau when it was a Portuguese colony.  After the handover to China in late 1999, the government of the new Macau SAR decided to end the monopoly.  It issued a new gaming concession to Mr. Ho, but also awarded one to Wynn Resorts and to Galaxy Entertainment.  Subsequently, each of the three was allowed to sell a sub-concession to another party.  Mr. Ho chose MGM.  He originally proposed a 50/50 joint venture between himself and MGM.  The Nevada gaming authorities apparently told MGM this was unacceptable because of Mr. Ho’s alleged underworld connections, and Pansy Ho replaced her father as the Ho family partner.

structure of the sale

Pansy Ho will provide all the stock being sold.  1% will go to MGM, giving it a 51% stake and making it the majority owner of MGM China.  Another 20% will go to the investing public (Paulson & Co. and Kirk Kerkorian, the largest shareholders of MGM, are together putting in for about 8% of the issue)It also appears that Ms. Ho has agreed to a 3% overallotment, meaning that the underwriters can increase the size of the issue by that amount, if demand is strong.

So, rather than having a large cash inflow from selling stock, MGM will pay Ms. Ho about US$75 million to gain legal control of the venture.

The news isn’t really so bad for MGM, however.

Not content with keeping the transaction simple, Ms. Ho has apparently agreed to invest several hundred million dollars of her IPO proceeds in securities of MGM Resorts.

Also, pricing at the top end of the range (which is where I would guess the IPO will end up) implies that MGM’s stake in MGM China is worth just under US$4 billion, or about half of the parent’s market cap.  From now on, we’ll probably see the same sort of “tail wagging the dog” effect on MGM shares as we’ve witnessed over the past year with WYNN and LVS.  Given the still parlous state of the Las Vegas market, this is perfectly understandable.  I interpret the recent strength in MGM shares as the start of this behavior.

Pansy Ho’s role in MGM China?

The IPO will confirm Ms. Ho’s status as a multi-billionaire.  Other than that, your guess is as good as mine–maybe better.

As I wrote in more detail a little while ago, in a bizarre sequence of events earlier this year, control of the Ho family gambling concession–by far the largest in Macau, accounting for about a third of the market–appears to have been taken away from Stanley Ho by, among others, Pansy.  Press reports suggest Pansy has resigned from the board of MGM China–though I understand the IPO documents say otherwise.  As I indicated in my earlier post, my reading of the situation is that Ms. Ho wants to present herself as a passive investor in MGM China while she fights for control of the family company.

It’s ironic if the IPO is the vehicle Ms. Ho is using to distance herself from MGM China.  That’s because the IPO seems to me to undermine the argument of the New Jersey gaming authorities that Ms. Ho is completely financially dependent on her father–and therefore unsuitable to hold a casino license.

My guess is that a smaller role in MGM China by Ms. Ho will make little operational difference, and may make both MGM and MGM China more palatable to US investors.

2 responses

  1. If you place a $4 billion (MGM 51% ownership)market value on MGM’s China IPO, what do you value the rest of the MGM properties? Thanks, Dan

    • Thanks for your question.

      The simplest comment I can make, though not really an answer to your question, is this:
      –if we assume that the MGM China IPO comes at the top end of the range, then the Hong Kong market is placing a value of US$4 billion or so on MGM’s 51% ownership interest;
      –if we subtract that from MGM’s market cap based on last Friday’s close (US$7.5 billion), then Wall Street is valuing the company’s Las Vegas holdings at US$3.5 billion (net of debt).

      Looking at the data this way may–or may not–provide information. If Wall Street valued MGM’s Las Vegas properties at zero or less, then you might argue that you if you buy MGM, you’re paying only for its Macau holdings and are getting a free warrant on the eventual recovery of Las Vegas. Unfortunately, that’s not the case–Las Vegas represents almost half of MGM’s value, even though the company is baely cash-flow positive from operations and has $12 billion in debt.

      Actually, your question about the value of MGM’s Las Vegas properties is interesting enough that I’m going to write about this in more detail in tomorrow’s post.

      Thanks again.

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