In Jim Murren’s own words MGM is “very determined to take Macau public.” The question is how much cash can MGM extract? Unfortunately, it may be less than people think.
Unlike some of their peninsula peers, MGM Macau had a rough start when it opened in December 2007. For the first seventeen months of operations, MGM struggled to generate a decent VIP book of business. Its tables consistently and materially under earned almost all of their peers. The rumors and reasons for underperformance were numerous:
- Poor traffic access to the property and construction projects all around it
- Over reliance on the “build it and they will come” belief
- The property was mismanaged and MGM was too busy with its problems in Vegas and opening City Center… MGM did almost file for bankruptcy in 2009… according to our sources the papers were ready to file
- Problems with Pansy Ho over who controls operations
- There were rumors that Pansy was purposefully mismanaging the property so she can buyout MGM’s stake on the cheap (we think this rumor is false)
- Not enough junkets at the property and poor marketing efforts
In May 2009 things began to change and the property seemingly hit its stride. There were a host of management changes at the property level, new and additional junket operators where brought in, the market as a whole began to lap some easy y-o-y comps beginning in July.
In 3Q09, MGM Macau recorded Rolling Chip volumes that were 64% higher sequentially and 63% better than their 5 quarter average RC Volume. The combination of explosive growth in VIP coupled with higher than normal hold, produced a blockbuster $73MM EBITDA quarter for the property compared to just $31MM of EBITDA in the 1H09 and $119MM of EBITDA for all of 2008.
The question is whether the results we saw in the 3rd quarter are sustainable? We think so, to some extent. There is the threat of more competition coming in the form of Wynn's Encore opening, a more aggressive SJM & ramp of Oceanus once the escalators open at the ferry terminal, and some potential pressure from Singapore. Perhaps even greater than the competitive threats, are those of government tightening and general slowdown of growth in China and how that could impact the Macau market as a whole (see our note "MACAU VIP AND THE MACRO VARIABLES" published on 1/26/10).
However, if we put market risks aside, the recent data coming from the property do suggest that the trends we saw in 3Q are continuing. While MGM wasn’t as lucky (hold-wise) in 4Q09, junket RC for 4Q was flat sequentially. We expect MGM Macau to report around $57MM of EBITDA for 4Q09. Our proprietary January data for the property also supported that RC in the $3BN monthly range was sustainable, as January’s junket RC was $3.1BN - the best month for MGM Macau since opening. If 3Q09 is the new normal for MGM Macau- at least in terms of RC volumes- then we think it’s reasonable to assume that MGM Macau can do $225-240MM of EBITDA in 2010 before MGM takes a royalty payment.
So what’s the right multiple to value MGM Macau? We would argue that MGM Macau should trade at a discount to where WYNN Macau and Sands China trade, since
- MGM Macau is a JV – and hence prone to more control and operational issues,
- Has less operating history, and the little it has has been inconsistent
- Risk of market share shift to Cotai
- No option on new property
- Potential conflict with Pansy?
Using a range of 12-14x EBITDA on an Adjusted EBITDA number of $220MM (after 2% royalty fee), we estimate that MGM Macau equity value is worth $2.3-2.8BN. In an IPO scenario with its 50% ownership, MGM would only generate maximum cash of $300MM assuming 25% is IPO’d.