LEISURE LETTER (03/09/2015)

Tickers:  PNK,GLPI, LVS, MGM



PNK/GLPI-   GLPI bids for PNK's real estate business - GLPI values its bid at $36 per PNK share. Presentation HERE

Takeaway:  We agree with most of the analysis provided by GLPI except the assumed multiple for PNK's OpCO.  See our note "GLPI/PNK: QUICK THOUGHTS". We think GLPI's offer is closer to $30-32.


LVS -  Sands China has announced a 5% pay rise for its staff, effective March 1, 2015. The company said it is increasing the salaries of 26,000 eligible full-time team members.  The salary increase follows the payment of a bonus on February 16. The casino operator last month said that a total of 27,000 full-timers would receive a bonus of at least one month’s salary.



Takeaway: Following SJM's lead in raising salary.


LVS - reconsidering Rolling Stones and other marketing/entertainment programs to cut costs in Macau.




MGM - The Labour Affairs Bureau says it has suspended the use of all cranes and hoists on an MGM China Holdings Ltd building site in Cotai after a concrete pipe dropped by a crane there fatally injured a construction worker below.  The Labour Affairs Bureau and MGM China both say they are investigating.



Takeaway: We're hearing this construction incident will delay MGM Cotai's opening to 1Q 2017, rather than late 2016.


Genting Singapore - RWS will borrow S$2.27 billion to refinance its debt. The five-year deal includes a $1.75 billion term loan, $500 million revolving facility and a $20 million bank guarantee facility.



Unpaid leave - Secretary of the Economy and Finance Lionel Leong Vai Tac has warned casinos to refrain from offering unpaid leave to employees that it has no work for, and to give them training instead. The newspaper quotes Mr Leong as urging casino operators: “Don’t offer unpaid leave, thank you. Offer paid training and training at work.” Speaking to reporters in Beijing, Mr Leong said how casinos treated their employees would count when the government reviewed their concessions.


Takeaway: Leong's comments are in response to Wynn Macau's suggestion that employees take unpaid leave. Unpaid leave had been a tool used by Macau casinos to cut costs without laying off staff. Not good for margins...


Infrastructure delays - The cost of the massive bridge linking Hong Kong with Zhuhai and Macau will rise above its HK$132.9 billion estimate because of a significant delay and the extra expense will be shared by the three cities, says Li Chunhong, director of the Guangdong Development and Reform Commission. Li said the completion date of the bridge would be revealed by October after an assessment.  The bridge was scheduled to be completed next year, but Li said even 2020 was a difficult target because of technical difficulties in laying sections of tubes on the seabed and joining them to make a tunnel.


Takeaway: Another major infrastructure delay for Macau


Angela Leong - Legislator and executive director of SJM Holdings, Angela Leong On Kei estimates that the industry has spent more than MOP2 billion in modifying their air purifying facilities and ventilation systems in order to comply with local smoking regulations whilst the government has been “ambiguous” in its tobacco control policy.  “If the government had implemented a full smoking ban in casinos in the very beginning, then a lot of resources and effort [to comply with smoking control policy] would have been saved,” Ms. Leong said.


Having expressed support on several occasions for a full smoking ban in casinos in Legislative Assembly sessions before, Ms. Leong argued that smoking lounges should be allowed to be retained in casino properties while having a full smoking ban in effect.


Takeaway: Angela is again pushing for an all-out casino ban on smoking. We think it is inevitable. 


Chui - aims to ‘optimize’ Macau individual travel scheme



Illinois Feb GGR- fell 5% YoY

Takeaway: Below expectations. Was it poor weather-related or is the weather tailwind over?


LV/AC hotel prices -’s Hotel Price Index shows the average price of a hotel in Atlantic City rose 10% last year to $149 in 2014.  Las Vegas increased 8% to an average of $120 a night.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

Keith's Macro Notebook 3/9: Euro | Commodities | Canada

Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.


Link to Report: Monday Mashup

  • Key Callout: removing short PNRA from our Investment Ideas list

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

European Banking Monitor: Swaps Tighten Ahead of QE

Takeaway: The U.S. market read the favorable jobs report as bad news while the global risk perception decreased as ECB bond buying is set to begin.

Key Takeaway:

Risk perception decreased, as Mario Draghi announced that the ECB would begin buying bonds today, March 9th. In our heatmap below, risk measures on the short term are mixed, while intermediate-term measures are mostly positive.


European Financial CDS - Swaps mostly tightened among European banks last week with Mario Draghi announcing that ECB bond buying will begin today, March 9th.


European Banking Monitor: Swaps Tighten Ahead of QE - chart1 financials CDS


Sovereign CDS – With ECB bond buying approaching, sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -14 bps to 83 bps, and Portuguese swaps tightened by -17 bps to 118 bps.


European Banking Monitor: Swaps Tighten Ahead of QE - chart2 sovereign CDS


European Banking Monitor: Swaps Tighten Ahead of QE - chart3 sovereign CDS


European Banking Monitor: Swaps Tighten Ahead of QE - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS was unchanged at 11 bps.


European Banking Monitor: Swaps Tighten Ahead of QE - chart5 euribor OIS Spread



Matthew Hedrick 



Ben Ryan






GLPI's offer to buy PNK looks like a good deal for both sets of shareholders




  • Somebody knew something as PNK traded up 7% last week versus PENN down 2% and BYD down 4%
  • GLPI’s effort goes against conventional wisdom that there can’t be a hostile takeover in gaming because of the regulatory scrutiny. PENN/GLPI management has consistently argued: why not?  I guess they’re putting their money where their mouth is
  • The likelihood GLPI will need to raise their bid is fairly high in our opinion, but it would likely be a “saving face” gesture to appease PNK’s senior management. Thus, we don't expect the sweetener will be material
  • We don’t exactly agree with the offer valuation provided by  GLPI: 
    • Specifically, GLPI values its offer at $35.77 per PNK share, comprised of $22.13 for the value in Pro Forma GLPI and $13.64 in value for Pro Form Pinnacle OpCo.  Our issue is with the latter. 
    • We do not believe a 7.5x multiple is appropriate.  While the best OpCo comp would be PENN and PENN does indeed trade at 7.5x EV/EBITDA, that multiple is based on 2015 EBITDA.  With full year contributions from 2 new properties opening in 2015 and 2016, PENN’s EBITDA is poised to grow 14% in 2016 while PNK OpCo will likely be flattish. 
    • Looking out to 2016, PENN trades at only 6x, a much more appropriate multiple for the PNK OpCo in our opinion. 
    • OpCo’s deserve low multiples in domestic gaming given the lack of growth, oversaturation, demographic headwinds, and the volatility of revenues without the underlying real estate value. 
    • As a pure play on regional gaming, we believe PENN is better managed and would warrant a higher multiple.
    • Our estimates for PNK are close to the numbers used in GLPI’s analysis
  • PNK is now trading at $33, below the GLPI assessed valuation of $36.  Investors seem to agree with GLPI’s 7.5x valuation of OpCo.  Using a more appropriate 6.0-6.5x valuation for OpCo, we arrive at only $30-32 in value per PNK share.  
  • Considering the 9 months to close for this potential deal, the uncertainty of the PNK board and shareholders accepting the deal, as well as the potential risks of not receiving all the necessary regulatory approvals, PNK’s stock looks overvalued here, even after incorporating $1-2 per share associated with a higher offer.
  • GLPI is currently up 9% in trading which looks appropriate

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei

*  *  *  *  *  *  *

It was a monster melt-up in USD #Deflation last week, with the Dollar climbing +2.5% to +8.3% YTD. Over on the Burning Euro front, the Euro was torched for another -3.1% weekly loss. It’s down -10.4% YTD.

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Draghi 09.04.2014


Perversely, both Japan and Europe are perpetuating Global #Deflation via their burning currency policies.

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Deflation cartoon 10.02.2014


On a related note, Japan’s “Weimar Nikkei” finally stopped going up every single day. It was down -1% overnight, after being up about that last week.


Japanese GDP? It missed again. But who cares? That only gets them to print moarrr Burning Yens!

QUICK HIT | McCullough: Dollar #Deflation, Burning Euros & the Weimar Nikkei - Abenomics cartoon 11.18.2014

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