Sands China seeks to buy back its stock which would effectively increase LVS’s stake and modest value.
CALL TO ACTION:
While trading in Macau stocks could be choppy, a fully implemented share repurchase program for Sands China Limited would be positive for LVS shares. We believe SCL creates value for LVS shareholders with cash that would otherwise be earmarked for dividends or sitting in the bank. Macau generates LVS’s highest valued cash flow stream so to the extent that SCL represents a higher percent of total EBITDA, that value should accrue to LVS shares.
While reviewing our 1Q14 notes and company filings, we were pleased to see a proposal in Sands China’ proxy to repurchase up to 10% of the issued shares. The proposal is Ordinary Resolution #5 on the Proxy for the Annual Shareholders Meeting scheduled for Friday, May 10, 2014 at 11 am at the Venetian Macao-Resort-Hotel.
Since Las Vegas Sands owns 70.17% of the outstanding shares of Sands China Limited, we expect this resolution to pass. Said differently, because the public float of Sand China Limited is 29.83%, the outcome is pre-ordained.
While the resolution if approved would allow for a 10% share repurchase, based on our read of the Hong Kong Stock Exchange listing requirements, Sand China Limited may reduce the public float to 25% without any approval requirements.
However, based on its equity market capitalization, SCL may petition the Hong Kong Stock Exchange for an exception to the 25% float requirement as the listing rules allow for a lower float of between 15% and 25% based on large equity market capitalization (see the rules below).
For LVS to achieve a 75% ownership stake in Sand China Limited, Sand China Limited would need to acquire 519,440,665 shares (based on 8,063,193,845 shares outstanding). Assuming HKD70.00/share, a 519.4 million share repurchase requires about US$4.69 billion. The 519.4 million shares represents about 6.44% of the total outstanding Sands China Limited shares.
For LVS to achieve a 80% ownership stake in Sand China Limited, Sand China Limited would need to acquire 990,925,239 shares (based on 8,063,193,845 shares outstanding). Assuming HKD70.00/share, a 990.9 million share repurchase requires about US$8.94 billion. The 990.9 million shares represents about 12.3% of the total outstanding Sands China Limited shares.
We believe because the Macau EBITDA is growing faster and is valued higher than the EBITDA from either Singapore or Las Vegas, such a repurchase makes sense. Also, as a result of the greater ownership interest in Sand China Limited (Macau), this value is beneficial to LVS in the form of greater share of future Macau dividends.
The buyback vs dividend use of cash flow is normally a slam dunk from a tax perspective. However, the Macau Gaming Tax offset already shields SCL dividend from US taxes. As of December 31, 2013, LVS maintained a deferred tax asset of $1.280 billion for U.S. foreign tax credit carry forwards. LVS’s incentive would clearly lie in owning more of the EBITDA stream and the value creation imbedded therein. Taxes are not relevant.
ADDENDUM: HKSE LISTING REQUIREMENTS
There must be an open market in the securities for which listing is sought. This will normally mean that:
(a) at least 25% of the issuer’s total issued share capital must at all times be held by the public
(b) where an issuer has one class of securities or more apart from the class of securities for which listing is sought, the total securities of the issuer held by the public (on all regulated market(s) including the Exchange) at the time of listing must be at least 25% of the issuer’s total issued share capital. However, the class of securities for which listing is sought must not be less than 15% of the issuer’s total issued share capital, having an expected market capitalization at the time of listing of not less than HK$50,000,000.
Notes: (1) Issuers should note that the minimum prescribed percentage of securities must remain in public hands at all times. If the percentage falls below the minimum, the Exchange reserves the right to suspend trading until appropriate steps have been taken to restore the minimum percentage of securities in public hands. In this connection, the Exchange will normally require suspension of trading in an issuer’s securities where the percentage of its public float falls below 15% (or 10% in the case of an issuer that has been granted a public float waiver under rule 8.08(1)(d) at the time of listing)
(2) Where the percentage has fallen below the minimum, the Exchange may refrain from suspension if the Exchange is satisfied that there remains an open market in the securities and either:
(a) the shortfall in the prescribed percentage arose purely from an increased or newly acquired holding of the listed securities by a person who is, or after such acquisition becomes, a connected person only because he is a substantial shareholder of the issuer and/or any of its subsidiaries. Such substantial shareholder must not be a controlling shareholder or single largest shareholder of the issuer. He must also be independent of the issuer, directors and any other substantial shareholders of the issuer and must not be a director of the issuer. If the substantial shareholder has any representative on the board of directors of the issuer, he must demonstrate that such representation is on a non-executive basis. In general, the Exchange would expect this to apply to holdings of the listed securities by institutional investors with a wide spread of investments other than in the listed securities concerned. Holdings of the listed securities by venture capital funds which have been involved in the management of the issuer before and/or after listing would not qualify. It is the responsibility of the issuer to provide sufficient information to the Exchange to demonstrate the independence of such substantial shareholder and to inform the Exchange of any change in circumstances which would affect his independence as soon as it becomes aware of such change; or
(b) the issuer and the controlling shareholder(s) or single largest shareholder undertake to the Exchange to take appropriate steps to ensure restoration of the minimum percentage of securities to public hands within a specified period which is acceptable to the Exchange. (3) At any time when the percentage of securities in public hands is less than the required minimum, and the Exchange has permitted trading in the securities to continue, the Exchange will monitor closely all trading in the securities to ensure that a false market does not develop and may suspend the securities if there is any unusual price movement.
(c) Notwithstanding the requirement that the minimum prescribed percentage of securities must at all times remain in public hands, the Exchange may consider granting a temporary waiver to an issuer which is the subject of a general offer under the Takeovers Code (including a privatisation offer), for a reasonable period after the close of the general offer to restore the percentage. The issuer must restore the minimum percentage of securities in public hands immediately after the expiration of the waiver, if granted.
(d) The Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalisation at the time of listing of over HK$10,000,000,000, where it is satisfied that the number of securities concerned and the extent of their distribution would enable the market to operate properly with a lower percentage, and on condition that the issuer will make appropriate disclosure of the lower prescribed percentage of public float in the initial listing document and confirm sufficiency of public float in successive annual reports after listing (see rule 13.35). Additionally, a sufficient portion (to be agreed in advance with the Exchange) of any securities intended to be marketed contemporaneously within and outside Hong Kong must normally be offered in Hong Kong;