Press reports indicate that LVS is pursuing a Macau IPO on Hong Kong exchange through Goldman Sachs. As we pointed out in our 5/7 LVS note, "LVS: DON'T EXPECT A NEAR TERM ASSET SALE", we've been hearing that asset sales are not imminent, so an IPO announcement would confirm that to some extent. We've had discussions with LVS management regarding this very topic over the last two months. It was always an option but valuations were too low. That may no longer be the case. However, our sources indicate that the IPO timing may not be imminent either. There are still quite a few legal hurdles to cross.
Here is our quick analysis.
- Pro-rata allocation of corporate overhead
- 9x EBITDA multiple on 2010
- No value for undeveloped parcels (Sites 5, 6, 7, 8, 3)
We have $724MM of EBITDAR, net of corporate expense, equating to $6.5BN of enterprise value. Subtracting $3.2 BN of debt, less $525MM of estimated cash at the Macau entity, gets us to $3.8BN of equity value or $5.84 per share or $5/share on a present value basis.
To avoid a covenant breach in 2010, when the leverage covenant steps down to 3.0x, LVS needs at least $250MM of cash (even if they used all their cash on hand to reduce debt). However, they cannot really leave themselves without liquidity, so realistically they need about $500MM. If they want to resume construction on Sites 5 and 6, they need about $750MM. We also have them breaching in 3Q09 and 4Q09 - however, they have enough cash on hand to cure the breach - despite leaving themselves with low liquidity.
If you assume they need to raise about $750MM, that equates to a 20% IPO of the Macau entity (using our numbers). We assume this will simply show up as minority interest although they can do a variety of different structures, including spinning off the entire entity and issuing shares back to current holders... In any event, if they create a separate trading vehicle for LVS Macau, then it may "unlock some value" at that entity. However, this was obviously a more relevant catalyst for the stock when it was trading at $2 vs its current price. There are other examples of stub equities that haven't done anything for a company's valuation (like MPEL/242 HK) as well as a host of other examples where it doesn't matter. We think that this is just another way for LVS to avoid a covenant breach/incremental interest in Macau, but more importantly it will provide them with enough liquidity to resume construction and perhaps salvage some of their sunk costs.