breakup at Wynn Resorts (WYNN): what happened last Saturday

a little history

Steve Wynn is an iconic figure in the casino gaming industry.  Among other feats, he almost single-handedly re-glamorized the Las Vegas Strip while he was CEO of Mirage Resorts.  During the economic downturn of 2000, however, the board of that company accepted a takeover bid from MGM and showed Mr. Wynn the door.

Mr. Wynn then joined forces with Kazuo Okada, owner of a Japanese slot machine company, to develop a new upscale resort on nearby land.  Mr. Okada invested $380 million to obtain a 50% share of the venture.  Needing more money to advance his plans, Wynn Resorts went public in 2002.  So doing reduced Wynn’s and Okada’s ownership shares to 20% each.  Mr. Okada became the largest shareholder in WYNN when Mr. Wynn’s ex-wife received half of his stock in a divorce settlement.

the past year or so

The Compliance Committee of the WYNN board is led by board member Robert Miller, a former district attorney who served as governor of Nevada for ten years.  In February 2011, its investigation into the feasibility of opening a casino in the Philippines uncovered questions about possible violations of the Foreign Corrupt Practices Act (FCPA) by Mr. Okada in the Philippines while obtaining a casino license for himself there.

The board’s concern:  having a major shareholder and board member who could be deemed “unsuitable” to hold a casino license would put existing licenses in jeopardy.  As well, it would likely rule WYNN out as a candidate for new licenses (think:  Singapore, or permission to build a new casino in Macau).

In February 2011 the Compliance Committee opened an investigation of Mr. Okada.  Board worries were apparently heightened by Mr. Okada’s comments at board meetings, his unwillingness to participate in board FCPA training and his refusal to sign the company’s code of conduct.

(Reading between the lines, it also sounds like Mr. Okada continued to pressure the board to participate in his Philippine casino venture–something the board had ruled out–and had been intimating in the Philippines and elsewhere that he was secretly carrying out the board’s wishes.)

In September 2011, WYNN concluded there was a threat to WYNN’s business if Mr. Okada remained a board member/shareholder of WYNN and pursued his Philippine project.  The WYNN general counsel and compliance officer outlined the company position to Mr. Okada’s lawyers.  Mr. Okada said he didn’t see any conflict and declined to take any action.

WYNN then hired an outside law firm, run by a former head of the FBI, to conduct a detailed investigation.  According to Governor Miller, the inquiry turned up a pattern of violations of the FCPA by Mr. Okada and his companies.  Mr. Okada also told the investigators during a lengthy interview that he strongly believes he can continue to give valuable “gifts” to foreign officials, despite the fact this violates US anti-bribery laws.

last weekend

Last Saturday, after consulting with two sets of outside legal experts on gaming law, the WYNN board met.  It removed Mr. Okada as a director.  And it used the power given to it in the corporate charter to cancel Mr. Okada’s shares in WYNN.  It issued him a 10-year promissory note for $1.9 billion, bearing interest at 2% (payable in arrears), in compensation.

my thoughts

…just when you thought you’d seen everything!!

1.  I’m an investor, not a lawyer.  So I have to remind myself that I don’t have the specialized knowledge and training that may be needed to evaluate this situation correctly.

Still, given the array of prominent experts WYNN has assembled, I’d be shocked if the Nevada regulators don’t declare Mr. Okada to be “unsuitable” to hold a casino license in that state once it conducts its own investigation.  If so, I’d guess that undercuts possible legal action by Mr. Okada.

2.  WYNN’s charter apparently gives it the right to immediately revoke the shares of any owner the company finds to be “unsuitable,” which is a determination the board made about Mr. Okada on Saturday.

There’s no question of asking Mr. Okada to sell his holding; as of Saturday those shares no longer exist.

3.  The company charter apparently specifies the manner of compensation for cancelled shares.  Payment is supposed to be based on fair value and can be through a promissary note of at most ten-year maturity, paying an annual coupon of 2%.

Mr. Okada’s shares are “certificated,” meaning there’s either an electronic notation or a stamped notice, if they’re physical shares, saying that the stock has restrictions on sale.  WYNN didn’t say what the restrictions are, but they probably give WYNN the right to vet any potential buyer.  The certification would presumably bind any buyer, not just Mr. Okada.  It stands to reason that restricted shares aren’t as valuable as unrestricted ones.  …but by how much?

WYNN hired yet another expert firm, to determine “fair value” for the Okada holding.  Its conclusion:  fair value is a 30% discount to last Friday’s closing price.

4.  WYNN’s market capitalization was $14 billion last Friday.  So the market value of the Okada holding, were the shares unrestricted, would have been $2.8 billion.  In a sense, remaining shareholders make a gain of $900 million ($2.8 billion minus the $1.9 billion note), or about 8%, on their holdings through the share cancellation.

My guess is that the benefit to remaining shareholders is greater than that, if for no other reason than that the increasingly public tussle between Mr. Okada and the rest of the WYNN board was depressing the share price.  Because this situation is so unusual, however, I doubt Wall Street will assign even 8% extra to WYNN shares.

5.  Can Mr. Okada say he’s been harmed by the WYNN action?  Over the past decade, he’s received almost twice the value of his initial investment in dividends.  He’s now getting a note for 5x that amount.  My layman’s hunch is that his would be a hard case to make in court.

We’re in a wait-and-see situation now, in my opinion.  WYNN has asked the Wynn Macau board to remove Mr. Okada as a director, which I presume it will do.  It would be very interesting if the Macau authorities were to okay 1128’s pending new casino application once Mr. Okada is gone.  Another potential positive would be a speedy determination by Nevada regulators that Mr. Okada is indeed an “unsuitable” individual.

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