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Hong Kong IPO looks promising for MGM

16 May 2011

By Howard Stutz
A long-awaited stock offering by MGM Resorts International on the Hong Kong Stock Exchange is close to fruition.

It turns out the nearly 18-month wait could be profitable.

Analysts originally thought MGM China Holdings, secured by a minority stake in the MGM Grand Macau, would fetch MGM Resorts $300 million to $500 million. That was last year's prediction.

Several Asia-based analysts told Hong Kong media last week that the initial public offering could be worth in neighborhood of $1 billion to $1.5 billion.

So what happened?

Macau gaming revenues hit $23.5 billion in 2010, a 58 percent increase over 2009 and four times the annual take by casinos on the Strip. MGM Grand Macau collected about 8.9 percent of the overall market. Gaming revenues in Macau in the past three months set records, topped by April's $2.6 billion.

Two figures that stand out to investors are the amounts raised by Las Vegas Sands Corp. ($2.5 billion) and Wynn Resorts Ltd. ($1.63 billion) when the rival casino operators listed shares on the Hong Kong Stock Exchange in 2009.

MGM Grand Macau has been a work in progress for MGM Resorts since the company opened the nearly 600-room resort in December 2007. Operations were slow the first few years, but the opening of the connected One Central, a retail and residential complex that includes a Mandarin Oriental, helped boost business.

Operating income at MGM Grand Macau was $126 million in the first quarter of 2011, a 158 percent increase from the prior year.

MGM Resorts operates the MGM Grand Macau in a 50-50 partnership with Hong Kong businesswoman Pansy Ho. When the IPO is completed, MGM Resorts will have a 51 percent stake. Ho's ownership would be reduced to 29 percent, with the remaining 20 percent heading to the open market. She will also make a $300 million investment in MGM Resorts.

After the IPO, MGM China will pay MGM Resorts a 1.75 percent annual license fee with a cap of $25 million per year. The fee is similar to royalties paid by Macau subsidiaries to Las Vegas Sands and Wynn.

Last week, MGM Resorts filed its 200-plus-page prospectus on the IPO with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange.

Macquarie Securities gaming analyst Chad Beynon reviewed the filing and said investors owning MGM Resorts' shares on the New York Stock Exchange will benefit from the IPO's success.

"This is positive for MGM shareholders, given the valuation premium assigned to the Macau business segment," Beynon said.

In the filing, MGM Resorts gave background on operational results for the MGM Grand Macau, saying the property's cash flow could be $251 million for the first six months of 2011. The casino's share of the Macau gaming market exceeded 9 percent in each of 2011's first three months. Beynon thought March's slot machine revenues exceeded expectations.

"The first-half guidance is relatively conservative, given market trends and stable operating expenses," Beynon said. "As the company continues to grow its mass segment and nongaming, we would expect increased cash flow margins."

MGM Resorts also offered commentary on its plans to develop a property on Macau's Cotai Strip. Government approval for a site is still needed and the project is at least four years away.

"This is a realistic timetable, given shortage of labor and construction requirements," Beynon said.

Another post-IPO benefit for investors is that MGM Resorts will reveal a clearer picture on how MGM Grand Macau fits into the company's overall financial structure.

Las Vegas Sands' three Macau casinos account for 55 percent of the company's revenues. Some 69 percent of Wynn's revenues came from Wynn Macau and Encore. Total revenues for MGM Grand Macau are not reported because it's still a 50-50 joint venture.

MGM Resorts Chairman and CEO Jim Murren told analysts the company is pursuing a "prompt" listing on the Hong Kong market.

MGM Resorts has started premarketing the IPO and is expected to launch its road show Tuesday. Trading could begin in early June if all goes as planned.

Timing is everything.
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