My post last Friday outlined the upcoming IPO for MGM China, which will show us the Hong Kong market’s view of the value of MGM’s Macau exposure. At the top of the price range for the IPO (already specified by the HKSE), and based on last Friday’s closing prices, a 51% stake in MGM China would be worth about $4 billion (all amounts are in US$) and would represent just over half of MGM’s market capitalization.
A reader asked what the rest of MGM–its Las Vegas interests–might be worth. That’s not an easy question to answer. So I thought I’d write about what I think are the significant issues for all three of the big casino operators in the Las Vegas market.
the basics of the big three Las Vegas gambling companies
All three have subsidiaries in the booming Macau market.
All three are situated on the Las Vegas Strip, where about half the city’s 149,000-odd hotel rooms are located.
In addition to their expansions into Macau, all three have made major hotel/casino capacity additions in Las Vegas over the past few years–just as the economy was peaking. These were all multi-billion dollar projects, funded primarily with debt.
three points about Macau
1. This market is already many times the size of Las Vegas, measured by the amount of money bet in the casinos. So far this year, Macau gambling is expanding at a 40%+ rate. I think the market will get to at least double the current size before it gives any sign of maturing.
2. The obvious source of profits to each of the Las Vegas parents is its share of the Macau subsidiary’s profits. But that money isn’t readily available for use in the US. For one thing, it will likely remain in Macau to fund expansion there. For another, the way shareholders receive income from their stocks is through dividends, which have to be declared by the management (only Wynn Macau has done so) and would be subject to US corporate tax if repatriated.
3. WYNN, LVS and MGM all receive management fees from their Macau operations, in return for their operating expertise and for the use of their brand names. This is the partents’ major source of cash from the subsidiaries. In 1Q11 these fees amounted to $34.5 million for WYNN, $23.8 million for LVS and $38.0 million for MGM. (The LVS number seems too low to me, but that’s what’s in the company release.)
the Las Vegas problem
It’s hotel room overcapacity, specifically in the high-end rooms on the Strip where the big three are.
In 2006, the Las Vegas market had 132,600 hotel rooms and served 38.2 million visitors. By last year, visitor numbers had shrunk to 37.3 million, but expansion projects had increased the number of hotel rooms to 140,429. Together, the need to repay construction debt and the fact that the out-of-pocket costs to a hotel from having a room occupied for a night are less than $20, mean price competition to sign up guests has been wicked. The Strip accounts for about half the room base, but virtually all the expansion—so the trouble has been most acute there.
Although the situation for the big three is gradually improving, I think it could be several years before the market grows into the existing capacity.
valuing the big three (all capitalization figures are as of the close on 5/20/2011)
- WYNN: The company’s market cap is $18.1 billion. Its Macau holdings have a market value of $12.6 billion, leaving a $5.5 billion value assigned by the markets to the Las Vegas operations. In 1Q11, WYNN was right around breakeven in the US, with $60 million in cash flow. IN the US, WYNN has $87 million in cash on the books and $2.6 billion in long-term debt.
- MGM: The company’s market cap is $7.5 billion. Its Macau holdings are likely worth $4 billion, leaving $3.5 billion in value assigned by the markets to the US operations–which are all over the place, but mostly in Las Vegas. In 1Q11, MGM operated at a loss but had positive cash flow from operations of about $24 million. The balance sheet showed $431 million in cash and $12.1 billion in long-term debt. Until the IPO documents are available in the US, we won’t know how much of either of the last two figures is attributable directly to MGM China.
- LVS: The company’s market cap is $30.4 billion. Its Macau holdings have a market value of $15.1 billion, leaving $15.3 billion in value assigned by the markets to Singapore + the US. In 1Q11, US operations appear to me to have made a loss but hovered around breakeven on a cash flow basis. The balance sheet shows $3.1 billion in long-term debt against US operations and just under $800 million in preferred stock. The biggest issue with LVS is how to value the Singapore operations, which are in their infancy and which are wholly-owned by LVS–so there’s no separate market quote. A very simple approach would be to say that Singapore is earning about 20% less than Macau, and apply a Macau multiple to Singapore operations. Since LVS owns 100% of Singapore vs. about 70% of Macau, this would imply all the $15.3 billion is being allocated to Singapore and the US is in effect worth zero.
Take WYNN first. It’s the strongest company of the three, with its finances under much better control than the other two. Still, are the Las Vegas operations, generating $250 million in cash flow at an annual rate, but servicing $2.6 billion in debt, worth paying 22x cash flow for? I’d prefer 10x.
I see two possible justifications for the current WYNN valuation: the consensus expects a faster recovery in Las Vegas than I’m thinking, or (more likely, in my view) US investors regard WYNN as a more liquid and easier to buy version of Wynn Macau, and are willing to pay a premium to the Hong Kong price, simply to get exposure.
MGM. If you’ve read any of my previous posts about gambling in Macau, you know I find having to be a business partner with the Ho family to be a deal-breaker.
The hedge fund Paulson & Co has recently become a large shareholder in MGM, apparently betting on the large upside leverage MGM will have as/when Las Vegas turns for the better. After all, the company owns a ton of Strip real estate. Over the years, it bought the former Mandalay Bay as well as Mirage Resorts, and has built the gigantic CityCenter complex. Still, $12 billion in debt and cash flow of $110 million a year are a very risky cocktail to be involved in. Too risky for me.
LVS. This company’s financials are almost as complex as MGM’s, but I find it much more intriguing. Depending on how you value the Marina Sands in Singapore, you could think–as I suggest above–that the present stock price gives you the US operations for free. …less than that, if you buy the argument that LVS should trade at a premium to the value of its Asian holdings because its the only liquid and convenient way for Americans to buy them.
Yes, there’s $3.1 billion in debt linked to the US casinos + construction obligations that were suspended during the darkest days of 2008. But management fees from Macau and Singapore seem to me to be potentially large enough to service the debt, even without an uptick in the US business. Not for widows and orphans, however.
By the way, I own WYNN, Wynn Macau and a little bit of LVS.