MGM Resorts would achieve synergies and ensure a retendering of the MGM China concession in Macau if it sells a 20% stake from its Chinese subsidiary to a strategic partner from the internet or travel and leisure industries in China, Sean Ma, Founder and CEO of Snow Lake Capital investment fund wrote in letter to the Las Vegas-based gaming operator.
The Asian investment firm which manages in excess of $3 billion in assets and holds approximately 7.5% of outstanding shares of MGM China, a stake that makes it the largest public shareholder of the company, strongly believes such a scenario would represent a win-win situation for both parties involved.
Snow Lakes Capital outlined in its letter several reasons that such a move would create significant shareholder value to both companies, and even suggested a few possible Chinese companies which could easily be interested in acquiring a stake in MGM China.
Diversification away from Gambling
A new strategic partner would significantly increase MGM China’s exposure to non-gaming operations, a key factor for the retendering process, Snow Lake Capital noted, due to the clearly stated by China’s State Council long-term goal to develop Macau as a global travel and leisure destination, as per the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” the council published in February 2019.
Market Value Gain from Rerating Will Offset Sale
Comparing all six concession holders, Snow Lake Capital pointed that MGM China’s market valuation was 20% to 30% lower, mainly due to the uncertainty from the retendering process, as Macau officials already publicly announced there would be no subconcessions this time around.
Due to the significantly increased outlook of securing a new concession in 2022, markets would revalue MGM China stock, which currently trades at the bottom of all 6 compared by enterprise value to 2019 EBITDA, and if the stock goes to the sector average, it would be a 13% rise. In case MGM stock goes further up, to match the sector leader, the upside potential is 32%.
Sale Receipts to Fund Japan IR Application
The letter pointed out the sale of the 20% stake in MGM China would generate around $1.3 billion in cash, while MGM Resorts would need $2.4 billion to cover its 40% participation in the Osaka IR project, estimated at $12 billion, of which 50% would be debt-financed on the 40% participation precondition.
MGM and Orix Corporation would participate with equal shares and leave 20% of the IR Osaka casino project to a consortium of local investors.
Among the other reasons Snow Lake pointed out was the benefit from a potential partnership between MGM China Co-Chairman Pansy Ho and the new strategic partner, the positioning of MGM as a strategic partner for the investor’s internalization efforts, as well as the greater financial flexibility to make a more attractive bid to acquire its sports betting joint venture partner Entain Plc.
In response to the letter MGM Resorts released a statement Wednesday noting that
“MGM Resorts remains committed to Macau and will continue to take actions that are in the best interests of its shareholders and stakeholders”
while appreciating the level of constructive engagement it holds with MGM China shareholders.