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Macau Studio City, a new junket, and a blowout Q2 makes us wonder why the valuation discount remains so big.



We’ve updated our model for the accretive refinancing and we shake out at $0.32 for 2011, much higher than the Street at $0.21.  MPEL trades at a 25% discount to Wynn Macau, yet there appears to be more positive near-term catalysts for MPEL.



  • Neptune will open at City of Dreams hopefully by the end of June.  Neptune is one of the largest junkets in Macau and they are shooting for HK$3-4 billion on monthly roll.  We calculate that translates into an incremental US$6-8 million in EBITDA or a 5-10% increase in the current company-wide EBITDA run rate.  This is not in anyone’s model, including ours.
  • A blow out Q2 – we are currently estimating $172 million in Q2 EBITDA or approximately 25% above the Street and that’s after accounting for a softer June for the market.
  • A Macau Studio City announcement – We think a resolution between the two principals in his JV could be announced soon.  MPEL will likely take a sizeable equity stake and retain its management contract.  We estimate potential value accretion around $3 per share at the low end.  See analysis below:


VFC/TBL: The Shoe Fits


Conclusion: A bigger deal than VFC was initially looking to swallow, but this one makes sense on many fronts. It’s rare that we’re positive on an acquisition, but this definitely changes our longer-term outlook for VFC.



Its rare that we say this about an acquisition, but this VFC/TBL deal makes perfect sense to us.

A few considerations…

1)      It gets each company what they need. In the case of TBL, it puts the company in a portfolio that allow it to regain a shred of credibility – not to mention extremely good management which will, no doubt, be leveraged across a perennially poorly managed TBL. For VFC, it takes up footwear mix from roughly 15% of sales to greater than 20% -- and broadens international exposure to 35% pro-forma vs 30% today (VFC is 30% Int’l, and TBL is pushing 60%) representing significant progress towards achieving the company’s goal of 40%.


2)      The timing was ideal as well.  Think about it… TBL was faced with a class action lawsuit last week for allegedly misleading investors, where TBL blew out 4Q numbers, issued very bullish forward looking statements, and then missed meaningfully one quarter later (just after management sold stock at an increasing rate).  The evidence is compelling (see chart below).  This deal won’t make the lawsuit go away – but for the shareholders who stuck it out over six months, it gives some relief by valuing TBL close to where it was around the bullish 4Q print.


3)      This suit will be VFC’s problem to an extent  – but the scope will be greatly diminished – and if anything, more focused on the individuals at TBL as opposed to the company.


4)      This deal happened FAST. It was very quiet in the market without any meaningfully suspicious trading activity (while TBL mgmt continued to sell stock). What gives us comfort is that VFC had literally been doing due diligence on it for the better part of 10 years. It knows TBL better than most people at TBL do.


5)      One area we caution is that TBL’s SG&A is actually down by about 8% over the past 5 years. Yes, there are some moving parts with the closure of retail stores and the shifting of the Apparel business to PVH. But we never like to see premium-branded companies that shrink SG&A, We’d far rather see the company be a better steward of capital allocatioin, and invest in its content. Hence, our lingering concern here is that TBL actually needs more capital (talent/R&D/Marketing) before sales and margins have to remain robust.


6)      Chance of competing bid? Very unlikely. The 10.8x EBITDA multiple is steep – though it’s closer to 8x 2 years our if we give credit for 10% top line growth (which we’ll front them) as well as slight margin improvement, we get to a multiple closer to 8x – which is fair. In addition, Adidas and Nike are the two most likely suitors – and neither has a good track record of buying companies that need to be fixed. VFC has a better track record in doing so. Also, the fact of the matter is that the valuation on current year’s numbers is rich. If anyone were to step in with another bid, it’d need to assume an unreasonable level of synergies.


We’re making the following changes to out model:


Revenues – we’re assuming the deal closes mid-September, with Timberland adding $690mm in revs in F11 and $1.71Bn in  F12 accounting for 9% growth in ’11 and 11% in ’12.


Margins – we don’t expect significant synergies to be realized in F11 given one quarter with which to work, but do expect VFC to realize substantial synergies of roughly 150bps primarily in F12. We're usually not fans of gifting high expectations for synergies either. But in the grand scheme of what VFC can add as it relates to top line, Gross Margin, and to oan extent, SG&A, we're really not talking big numbers here.


Interest Expense – with the deal financed by $500mm in cash, $700mm in commercial paper, and $800mm in term-debt, we are layering in $28mm in interested expense in F11 and $75mm in F12.


EPS – based on the our calculation, we expect $0.30 of accretion in F11 (assuming roughly $30mm in 1x charges) and approximately $0.75 in F12 assuming 150bps of margin expansion in the TBL business bringing our earnings estimates to $7.45 and $8.75 in F11 and F12 respectively.  While we're above management's guidance for deal accretion, unfortunately we are still slightly behind in assumptions for its other core businesses. Net them all out and our sense is that consensus estimates will shake out ahead of ours. If not, we'll likely change our near-term tune on the stock. 


 VFC/TBL: The Shoe Fits - TBL 6 13 11 Stock Sales




European Risk Monitor: Germany’s Tension Tamer

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


Below we show our weekly European Risk Monitor charts that indicate more of the same trend:  risk premiums across the European peripheral continue to blow out over the intermediate term, a trend we expect to continue even as troika (European Commission, ECB, and IMF) continues to subsidize the PIIGS to prevent in their minds the “ugly” words of default and restructuring. Troika’s actions should however also continue to support the EUR-USD around $1.40, with upper resistance around $1.45.


European Risk Monitor: Germany’s Tension Tamer - a.1


European Risk Monitor: Germany’s Tension Tamer - 6 13 2011 11 12 19 AM


The newest piece of “support” in the developing dynamic of the periphery’s sovereign debt imbalances and the growing counterparty exposures between domestic banks, the Eurozone National Central Banks, and ECB, is Germany’s increasing approval of a second bailout package for Greece. The latest band-aid proposed is ~ 90 B EUR, complicit with the Greeks selling off state assets worth ~ 30-50 B EUR and more strict enforcement of austerity measures.  German Finance Minister Wolfgang Schaueble has called for investors to exchange all the Greek bonds currently in their portfolios for new ones with maturities extended by seven years. This presumes lower interest rates, with the original principal paid in full at the new maturity. The extent of this haircut, however, is not known, and obviously a very substantial risk. The ECB’s stance continues to be one against investors (namely private) taking on any losses, but in favor of any bailout to direction attention away from default and restructuring talk.


Our European Financials CDS Monitor shows that Bank swaps in Europe were wider last week on a week-over-week basis.  35 of the 38 swaps were wider and only 3 tightened, with Italian and Portuguese banks looking the worst. 


European Risk Monitor: Germany’s Tension Tamer - euro cds


We continue to take very conservative view of Europe, tending to favor the region’s fiscally sober countries with healthy growth profiles, like Germany and Sweden. That said, Germany, which we’re currently long via the etf EWG in the Hedgeye Virtual Portfolio, has not performed well, with the DAX at +2.8% YTD but down -4% over the last month. Alongside the swing our position has move to one of caution as the high frequency data has slowed over the last 2-4 months.


At the right price we’d re-short Spain (EWP) again.  Macro data from the periphery continues to suggest marked headwinds as inflation accelerates, austerity chokes off growth from already anemic levels, unemployment accelerates, and consumer and business confidence shake.


Matthew Hedrick


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No change to HK$18.5-19.5BN revenue estimate for June



Macau generated gross gaming revenues (GGR) of HK$7.46 billion for the first 12 days of the month.  Average daily revenues of HK$621 million were consistent with the first week of June.  Thus, we maintain our full month estimate of HK$18.5-19.5 billion of GGR.  After an amazing May (HK$23.6) billion, a 19% sequential slowdown could be somewhat of a disappointment to investors even though YoY growth should still be around 45%.


LVS continues to hold very well in June, boosting its market share to 17.9%, 240bps above its trailing 3 month average.  MPEL pulled to within 50 bps of its trailing average despite the opening of Galaxy.  MGM was the big loser this week dropping all the way below 7%, no doubt impacted by luck.  Galaxy looks like it is normalizing at around 18.5% since Galaxy Macau opened.




The Macau Metro Monitor, June 13, 2011




Chinese financial institutions issued 551.6 BN yuan (US$85 billion) of new loans in May, down from 739.6 BN yuan loans in April and missing consensus expectations of 650 BN yuan loans.  May M2--a money supply measure--was up 15.1% YoY (consensus: +15.5%), which is slower than the 16.6% rise in April.



The new 20% stamp duty for residential real estate transactions will come into effect tomorrow.  The special stamp duty will be applied to residential properties resold within a year of their purchase.  The levy will be reduced to 10% if the resale takes place between one and two years after purchase.


The law states that a revision should take place in mid-2013, taking into account changes in the real estate environment in Macau.


Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • WEN has struck a deal with Roark Capital Group to sell its Arby’s chain.  Under the terms of the deal, WEN will receive $130 million in cash and retain an 18.5% stake in the Arby’s business (a stake valued at $30 million).  Roark will assume $190 million of Arby’s debt and the deal will generate a tax benefit of $80 million to Wendy’s.  The total value of the deal is estimated to be $430.
  • CPKI is being sued by an investor who is alleging that the acquisition of the company by an affiliate of Golden Gate Capital, at $18.50 per share, undervalued the company.
  • SONC shares gained on accelerating volume on Friday.  KONA underperformed, its shares sliding 3.1% on accelerating volume.




Howard Penney

Managing Director

Early Look

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