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MGM to Gain Controlling Stake in Macau Facility

Posted on April 15th, 2011

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MGM Resorts International is hard at work looking to gain a larger, if not a dominant, stake in one of the most well-known gaming facilities in the biggest gambling market in the world. And thus far, its efforts appear to be bearing fruit as an announcement released Wednesday indicated that MGM Resorts has successfully negotiated an arrangement with Pansy Ho, one of Macau gambling kingpin Stanley Ho’s daughters, to gain controlling shares in the Macau MGM casino. Prior to the announcement, MGM Macau was a joint venture with Pansy Ho and MGM Resorts International with Pansy holding the dominant stake. Pansy knew the ins and outs of the local markets, learning from Stanley Ho’s monopoly of the area until 2001 when the Chinese government decided to issue gaming licenses to other gambling operators; the MGM carried a name that has established itself as one of the biggest in Las Vegas – the former gambling capital of the world – and was widely recognized for its stature and luxury.

With the deal completed, MGM Resorts International will hold a 51% stake in the Macau facility via MGM China Holdings Ltd. Ms. Ho will retain a 29% stake in the company. The balance from Ms. Ho’s previous stake will be offered in an initial public offering and proceeds will then go to other entities controlled by Ms. Ho. The IPO will happen on the Hong Kong Stock Exchange later this year. The deal was crafted from an initial arrangement where both MGM Resorts and Pansy Ho each had 50% of the stake earning Ms. Ho a seat on the company’s board. The details of the deal required Ms. Ho to also buy $300 million of debt-laden MGM Resort’s convertible senior notes with terms akin to its existing 4.25% convertible senior notes which are due to mature in 2015. In the process, MGM will get $311 million in proceeds from Ms. Ho in the form of a loan.

The announced deal is contrary to common expectation which had the MGM gaining straight out of the IPOs proceeds. Still, the construction of the deal is actually more beneficial for MGM in that it allows the company to retain more revenue and profits from the venture even as the Macau gambling market continues to grow and is not showing any signs of relenting. In comparison, MGM’s Las Vegas facilities where it originally made itself known is suffering from a bad stretch and has remained stagnant for many months following the global economic crisis. Such as arrangement is expected to give the MGM a healthier financial flow that will give it more capital for any required investments to boost the Vegas market.

The IPO is planned in May although no date has been set. A source close to the situation estimates that up to $1 billion could be raised from the transaction. The arraignment also addresses previous issues pertaining to the structure and ownership of the company. The 50-50 split made it hard to determine who was making the decisions when it came to big investments or strategic moves and the current deal smoothes this up nicely. Analysts are also abuzz over what the IPO can potentially bring to Macau in terms of new investments. “It’s unambiguous now,” said the source. “MGM controls the company.” That same source also divulged that Pansy Ho will retain her seat as chairman and managing director of the company although it is expected that she will play a lesser role in critical decision making moving forward.

Shortly after the deal’s announcement, MGM resort shares in composite trading rose to $13.70, up 8.6% from $12.61, on the New York Stock Exchange. Today, Macau stands as the largest gambling market in the world, and has been the case since 2006 when it overtook Las Vegas, posting a total revenue of $23.6 billion in 2010. That number amounts to more than four times the combined profits of all Las Vegas casinos for the same year. While MGM is certainly a player in the region, it lags behind other U.S. rivals like Wynn Resorts Ltd and Las Vegas Sands Corp from a market share perspective. Still, MGM’s recent increasing trend is giving hope that MGM can translate its Vegas success into more business in Macau.