WYNN: COTAII OPTION VALUE

Following my trip to Macau, I’ve gotten more positive on the long-term prospects of Macau. I’ve written numerous posts discussing why this is, so I won’t waste space here. Despite the favorable outlook, I certainly recognize the uncertainty surrounding the Macau marketplace. For this reason, it seems to make a lot of sense to look at the value imbedded in WYNN’s Macau concession. Specifically, I believe there is significant option value in Wynn’s opportunity to build on the Cotaii Strip should: a) Macau continue to grow and b) Cotaii be a successful destination within Macau. I vote yes on both counts.

Clearly, this analysis could be used for any of the other 5 concessionaires, but WYNN is the only company with the financial resources to make it happen. Besides, an option in Steve Wynn’s hands is worth much more than any other operator in gaming.

Based on the following assumptions, I estimate straight equity value related to Cotaii of $4 per share:

-8x terminal multiple of EBITDA
-20% discount rate
-$2bn total investment cost
-$350m in EBITDA

However, I calculate an incremental option value of $2 per share for total Cotaii value of $6 per share. With WYNN’s enterprise value trading at only 8x core EBITDA, I do not believe any of this value is reflected in the stock price. Nor is any value, option or otherwise, associated with likely future Macau development in the stock.