GS ended up on the right side of the MGM stock call but the analysis was full of holes.



Fitting perfectly in the apples vs. oranges category, Goldman Sachs made an aggressive buy call on MGM based in part to the valuation discrepancy between LVS/WYNN and MGM.  No I’m not kidding.  That’s like buying a bottle of Riunite because it’s cheaper than a 1997 Brunello (with no sales or alcohol tax!).  Sure Bellagio is a great asset but how can one compare EV/EBITDA multiples of Excalibur/Monte Carlo/Circus squared etc. operating in the highest corporate income tax jurisdiction (USA) vs Wynn Macau/Venetian Macau paying no income taxes on gaming profits?


At 9x leverage, the MGM equity is essentially a call option.  MGM the company is back to being a domestic gaming company and should be valued as such.  Despite management’s attempt to position it as a “Convention Company”, it is not.  Convention rooms booked represent 11% of total and rates are so low that the casino business drives most of the profits.  It is clear that MGM never became a hotel company, a brand company, an international company, etc., or the past iterations.  Back to basics fellas.


Our point in this note is not just to trash Goldman Sachs.  The point is that MGM’s stock is on a tear and some of that is based on faulty analysis.  MGM’s stock may continue to run but at least investors should be focused on the right issues and not on the company trading at Macau/Singapore multiples. 


Here are some assertions from the Goldman Sachs report and our commentary:



“New analysis shows MGM shares undervalued relative to its peers”

  • In other words, using the inflated values of other companies to justify ‘buy rating’ 


“Las Vegas operation for Las Vegas Sands is trading at a seven point premium to MGM shares on 2011 estimates (LVS 16X EBITDA, vs. MGM 10X).  We arrived at this by backing out the Macau portion using the current stock price of Sands China and then applying a Genting Singapore multiple to our 2011 Marina Bay Sands EBITDA estimates.”

  • Well, he’s using an 11x multiple for Singapore which is too low in our opinion and hence he’s getting a much higher implied value for Vegas.  We have Singapore & US at an implied multiple of 14.8x but there is no question that Singapore deserves a much higher multiple than Vegas.  Another issue with this valuation is making the statement that MGM’s Vegas business should trade at the same multiple as LVS’s.  LVS has two nice 5 star properties – MGM has Bellagio and 50% of Aria and a bunch of impaired assets that are never going to fully recover.  We know that those assets wouldn’t trade for more than 8x – since we have the TI comp (sold last year) which is a better asset than Excalibur/Circus Circus/Monte Carlo. 
  • You can pull out Singapore if you want and try to isolate it, but a few points.  Singapore should have a huge ramp in earnings over several years, operates in a duopoly market, and it’s a pristine trophy asset.  Moreover, the corporate income tax rate in Singapore and Macau is so much lower than in the US so if you use EV/EBITDA, that should account for 3-4 multiple points.  I can see someone saying 15x on it easily for 2011 EBITDA which should grow double digits for years to come.  Singapore will be over 60% of the “Singapore / Vegas” EBITDA as well so if you put an 11x multiple on it – of course you get a huge Vegas number.


“Carrying out the same analysis for Wynn’s Las Vegas operations, we find that again MGM shares are trading at a discount (WYNN 15X 2010 EBITDA vs. MGM 10X). Again we are not sure if this calculation truly reflects what investors really believe Wynn Vegas assets are worth but even if the discount was “discounted,” MGM shares are trading well below other Vegas assets.” 

  • We actually have WYNN Vegas at 16x 2011 – but maybe our numbers are too conservative.  Again, it’s like valuing a Porsche and a Toyota – you can’t compare Wynn’s 2 top notch assets to MGM’s portfolio.  WYNN also has a pristine balance sheet – while MGM has a load of debt issues down the road.  WYNN also pays special dividends while, with MGM you face the risk of being diluted in an equity offering.


“We could argue that MGM, with the dominant position on the Vegas Strip, might merit a premium to the other companies’ Vegas operations given the value that dominance in a city can create. We also admit that MGM’s balance sheet and exposure to currently weak Las Vegas could make some investors hesitant, but the discount is so significant it suggests MGM shares are undervalued from a relative value basis.” 

  • Yea you can argue that but it’s kind of a silly argument when you compare their real estate to WYNN or LVS.  Sorry but there is no way anyone pays the same multiple for Monte Carlo/Excalibur/New York NY/ Circus Circus/ etc as they would for Venetian.  Cross marketing on the Strip has not helped those properties much or at least you wouldn’t know it from the numbers.


“We would also point out that MGM trades at a big discount to other hotel companies. Starwood, Marriott and Hyatt all trade at 12X to 13X 2011E EBITDA. Even with Vegas oversupply issues, financial leverage and concentrated market it appears to us that MGM is one of the least expensive ways to invest in a strong business and leisure travel rebound.”


  • Yeah and if my Aunt was a man he’d be my Uncle.  The fact is those hotel companies have very modest leverage, are diversified, and control supply.  They also generate much more business from convention and business travelers (which GS is very high on) than MGM.  This is almost like saying if Riunite wasn’t such a bad wine it would be more expensive.  Those are real issues for MGM that the hotel companies don’t have.


“Macau IPO seems to moving along …Regarding Macau, the company stated in its 4Q2009 earnings conference call the following regarding its JV in Macau: ‘Our partner and we are very engaged in this and we think going public makes sense, and we have been always articulating the fact that we'd like to go public by midyear.’  Additionally, just last week news sources reported that MGM has hired five banks to manage a planned $500 million Hong Kong listing.  This implies a 14X multiple on our 2010E EBITDA, which would be roughly in line with where Las Vegas Sands (Sands China) and Wynn (Wynn Macau) Hong Kong listings initially priced last Fall.” 

  • We don’t think MGM deserves the same multiple:  1) only a short and poor track record, 2) it’s a JV, 3) no visibility on when asset #2 will come along, and 4) all the investigations.


“…As does the sale of The Borgata...

In Atlantic City, MGM also owns 50% of Borgata and on March 12, 2010 put its stake into a Divestiture Trust to be sold within the next 30 months. Borgata’s peers – the regional operators – are trading at an average 2010E EV/EBITDA multiple of 9X. We forecast The Borgata to generate 2010 EBITDA of $182 million. Borgata EBITDA peaked in 2005 at $252 million. The Borgata joint venture currently has $586 million of net debt. Using the average peer multiple and our forecasted EBITDA (discounted to account for the impact of table games coming online in Pennsylvania) would suggest a value of $1.6 billion.” 

  • A forced seller of a non-controlling/managing stake?  We’re going to go out on a limb and say they won’t get a good multiple here.  Oh, and AC is being squeezed by competition on all sides with no signs of abating.  Where do I put my bid?


“CityCenter JV has monetization opportunities...

MGM may also look to monetize its stake in the CityCenter joint venture of which it owns 50%. Options include increasing leverage (current debt levels at $1.8 billion), selling a hotel/condo tower, or selling the retail.


While the main Aria hotel tower (4,000 rooms) is likely to remain at the joint venture, the venture could explore selling one of the other towers such as the 400-room Mandarin Oriental or the 1500 room Vdara.  With the economic slowdown, transactions within the hotel space have understandably been very limited.  However, there were some transactions in 2009 among which include the St. Regis Monarch Beach $245 million acquisition ($612,500 price/room), the Hyatt Regency Boston’s $133 million acquisition ($226,900 price/room) and the W San Francisco’s $90 million acquisition ($222,770 price/room).  The second option for CityCenter could be to increase the leverage on the property. With $1.8 billion in debt and an estimated $400 million in EBITDA for 2010, the property could potentially take on more debt, possibly up to a 6X level.”


  • If they do $400MM in 2010 that will be a heroic act – we’ll take the under on that bet (but only in Vegas because gambling is illegal in CT).  Don’t forget that they spent well north of the quoted per key rates above in building these wonderful rooms.  Small point but Harmon isn’t even finished yet and that’s because it costs more to complete than what they can “monetize” this “hidden” asset for.


On March 17, we posted a note titled “Feels like 2007” - in that post we provided a list of restaurant companies that could be on the “A” list for a private equity transaction and/or for becoming victim of the rumor mill.  Here is the list again: CAKE, PFCB, MSSR, TXRH, BOBE, EAT, CHUX, RRGB, PEET and CPKI.


Late Friday, the WSJ reported that private equity firms are among those considering an acquisition of CPKI.  In the CKE Restaurants proxy filed back on March 17, it was revealed that three other private equity firms were taking a look at the books of CKE Restaurants.


Today CPKI announced 1Q10 same store sales of (2.7%) and revenues of $156.7M vs. consensus of $157.2M. It is also guiding 1Q10 EPS to $0.07 vs. prior $0.05-0.07; EPS excludes an approximate $0.03 benefit for gift card breakage - consensus is $0.07.  More importantly, the company CPKI announced that its board has authorized management to consider a wide range of financial and strategic alternatives to enhance shareholder value.  Included in the announcement was the statement that “Financial and strategic alternatives may include, but are not limited to, changes in the company's capital structure, or a possible sale, merger or other business combination.”


If management is looking to sell the company because they want liquidity (the co-CEO owns 8% of the company) I can understand that, but changing the capital structure will not create shareholder value.  Moelis & Company are going to produce a table for management that will look something like the table below.  The format is taken from the CKE Restaurants proxy as part of the fairness opinion that was used to justify the THL offer for CKE.  


For the purposes of a comparative valuation for CPKI, we used BJRI, TXRH, CAKE, BWLD, DRI, PFCB, RUTH, EAT, BOBE and RRGB.  These companies represent a mixture of regional and national brands that have both meaningful and limited growth opportunities.  CPKI’s presence in the supermarket channel gives it national brand characteristics, with a regional concentration of restaurants.  Given the turmoil of the past year, historical numbers are important for context to the risks of the business but, not that representative of the growth potential over a typical 5-7 year holding period for a private equity firm.  That being said, a fair range of $20 to $25 is possible, with $22 looking likely.   



Lastly if a bidder does emerge for CPKI in a range of $20-$25, the acquisition price will be significantly higher than what THL is offering for CKE restaurants.  THL is currently offering $11.05 for CKE, which I think not a great price for shareholders.  I think the price should be closer to $14-$15. 




Howard Penney

Managing Director


Galaxy Entertainment hosted a conference call to provide a financing update.  Here are our notes.




  • Galaxy announced that it procured a HK$8.8BN secured club loan with a consortium of Asian banks that will provide enough financing to complete the HK$14.1BN Galaxy Macau development scheduled to open in early 2011.
    • Loan was oversubscribed
    • Banks will not syndicate the loan
    • "Terms represent lowest cost of capital available in the current market" - H + 4.5% (4.7% today) with a Term of 6 years (compares to their 9.7% current rate on their debt)
  • Detailed Annual & 4Q09 update on 4/20/2010


  • The facade of building is almost complete. They have over 2,000 workers there currently.  Don't need 3-4,000 people for the project.
  • Have a full master plan for the site that they have submitted to the government - there will be at least 4 phases.  Decided not to build it all at once
  • Closing on the transaction? Final stages of the documentation stage now, closing end of April /early May closing
    • Covenants? Taken lessons from others to avoid mistakes
  • Why no syndication?
    • Vote of confidence in their strategy.  The entire amount is being held with no sell down for the entire term
  • Any shift to profit share from 1.25% RC programs? Not really
  • Cotai project isn't impacted by the table cap

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The Macau Metro Monitor, April 12th, 2010


Galaxy Entertainment Group Ltd., the casino operator part-owned by Permira Advisers LLP, received a six-year HK$8.8 billion ($1.13 BN) loan for the construction Galaxy Macau. Seven banks including Industrial & Commercial Bank of China Ltd. and HSBC Holdings Plc helped structure the club loan. The facility will pay 4.5% + HIBOR. The resort is scheduled to open in early 2011. The company is accelerating construction and may have a “soft opening’ as soon as the end of this year, Chairman Lui Che Woo told reporters in Hong Kong today.


The facility “fully funds” the resort’s development, Galaxy said. “The terms of the club loan are significantly more favorable than the group’s existing bonds,” the company said. “This proposed agreement significantly lengthens the group’s debt-maturity profile as well as enhances its financial efficiency and flexibility.”


Galaxy Macau will be able to accommodate 600 casino tables, Chief Financial Officer Robert Drake said today. The resort will contribute a “significant amount” to the company’s balance sheet from 2011, he said.



There is an opening of an air operating licence following the dispute between Viva Macau and the Macao government. According to people close to the situation, interested parties include Malaysian budget carrier AirAsia, which has held preliminary talks about establishing a joint venture in the Chinese special administrative region. Macao’s civil aviation authority revoked Viva’s air operator certificate on March 28.


Viva maintained last week that it stood “ready to resume service with our reinstated AOC”, and some of the airline’s financial backers are scheduled to meet Fernando Chui, Macao’s current chief executive, today. The Macao government could choose to reinstate Viva’s AOC, with or without new partners, or pursue discussions with other airlines about entering the market, which is dominated by state-owned Air Macau.


While AirAsia considered becoming involved with Viva at the time, talks had not progressed beyond initial stages. AirAsia would also insist on operational control over any joint venture with Viva, along the lines of its existing joint ventures in Indonesia, Thailand and Vietnam. “Most likely AirAsia won’t go in because of this and other considerations, but the idea is still being considered,” one person involved said. He added that the Malaysian airline was “fully occupied” with the Vietnam joint venture with Vietjet Air, which was cleared last week by Hanoi.


A Macao deal would also offer the possibility of taking advantage of Macao’s “fifth freedom” rights to operate flights to the US.

Government Groupthinkers

“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.”

-Thomas Jefferson


I have recently started to dig into one my favorite author's latest book, “The End of Wall Street”, by Roger Lowenstein. The title of the book is nothing like what UBS printed in quarterly earnings this morning ($2.4B of pretax gains; their best quarter of money making since Wall Street’s elite sold all political lemmings on the narrative fallacy that this was going to be the Great Depression).


Lowenstein is usually much more of a leading indicator than a lagging one. He is one of the great chroniclers of economic history. He understands that economic stories don’t always repeat, but the human behavior that creates them certainly rhymes.


In 1995, he wrote “Buffett: The Making of an American Capitalist.” This was right before I, and plenty of others on the “concentrated investor” side of the hedge fund community, started making up stories in our own heads that we were the next Oracles of Omaha.


In 2000, Lowenstein wrote “When Genius Failed”, the story of Long Term Capital Management. Not surprisingly, Wall Street proved to learn nothing from this very recent history that abusing leverage and financial products ends in tears. His least popular book, “While America Aged”, was penned in 2008 and, unfortunately, Roger’s call on the un-sustainability of America’s pension and off-balance sheet liabilities has yet to play out in full. Give it time.


So here we are in 2010 and Lowenstein is back with another early call. Have we evolved to protect our citizenry against the greatest of dangers to be feared? Sadly, we have not. Largely, I think that this is because the mother of all bubbles has yet to pop – I’ve called this the Bubble in Global Politics.


In “The End of Wall Street” Lowenstein’s starts off by reminding us where all of these issues were born. It wasn’t in the laundry list of finger pointing items that Robert Rubin gave you last week. Ultimately, he didn’t write this (but I will). The birth-child of this mess has always been grounded in an ideology of marking-government-liabilities-to-model.


Lowenstein gets right to the heart of the matter when he states plainly that Greenspan’s ideology “was a Rousseauean vision of markets as untainted social organisms”… and that “if central bankers could not be trusted to say that markets were wrong, neither could they be trusted to interfere in them.”


Maybe that’s why Roger told me on Bloomberg TV on Friday night that “Bernanke is basically Greenspan light.” We may very well have another man at the helm who looks more modest when he asserts that he couldn’t tell a bubble if he himself was in it, but we should definitely be taking his word for it.


This morning you are seeing the danger associated with Piling Debt Upon Debt Upon Debt onto the highest levels of sovereign debt that this world has ever seen. Ever, of course, is a very long time. And unless you know anyone who has lived beyond that, you’d be best served not taking their word for it that this won’t end with inflation.


This isn’t just a Bubble in American Politics – it’s global this time. Greenspan taught the Europeans and Asians well. Consider these 3 comments coming out of Europe and Japan this morning:

  1. “The package sends a clear message that nobody can play with our common currency and our common fate.” -Greek PM George Papandreou
  2. “It shows there is money behind this.” -Luxembourg PM Jean-Claude Juncker to reporters in Brussels after chairing the EU conference call.
  3. “There was no solid justification for enhancing easy monetary conditions” -Bank of Japan policy maker, Miyako Suda

Now the first two quotes are going to be pretty well disbursed to world news headlines this morning, but will the Manic Media be able to contextualize what this all means in the aggregate? This morning’s perceived Greek bailout may address Greece’s upcoming debt obligations for 2010, but this is not in a done deal and it’s less than 15% of the 304B in Euros these political bubble blowers ultimately owe.


The third quote comes from an island nation that is running close to 200% debt/GDP who decided to double its free-money lending program to 20 TRILLION Yen. Yes, that’s only another $213B in US Dollars. Heck, who is keeping track of these T’s and B’s anymore.


Reality’s Illusion is that globe-trotting politicians can all act with the same Greenspan Groupthink and that Piling Debt Upon Debt Upon Debt won’t end in either inflation or a massive sovereign blowup. This is a hope… and hope is not an investment process. So when we blow up again (and yes, we will), there is no telling stories that no one saw this one coming.


China reported its 1st trade deficit in 6 years last night. Why? Inflation. Imports were up a mind-numbing +66% year-over-year and this was largely driven by import prices climbing to +17% year-over-year. Great Depression in 2008 banker bonuses, maybe. But this is no time for “emergency” rates of ZERO percent.


Meanwhile, back in America, all of the inflation doves who are still pointing to the February CPI and the Fed minutes which were based on the same can look forward to being “surprised” by this Wednesday’s inflation report.  


Again, if your argument is that American wages are not inflating, you are likely going to amplify my argument. What do you think Thomas Jefferson would have called an environment where most citizens other than those chowing down on UBS’s Piggy Banker Spread (+283 bps wide this morning) are losing job and wage growth but everything that they buy (other than a levered up house in foreclosure) is going up?


My immediate term support and resistance lines for the SP500 are now 1181 and 1198, respectively. I’d be a short seller of all-hopes and lies from European Government Groupthinkers on any Euro strength today. Our refreshed immediate term TRADE range for the Euro is now 1.32-1.36.


Best of luck out there today,



Government Groupthinkers - Pic of the Day



“The object of golf is not just to win. It is to play like a gentleman, and win.”

-Phil Mickelson


It’s hard not to like the storyline coming out of Augusta, Ga. on Sunday and the Drudge Report having a picture of Tiger Wood with the caption “WHATEVER.”  It’s hard not to like the storyline the market is telling either.  That being said, due for release on Wednesday, April 14th, the March 2010 CPI should show inflation accelerating, thanks to higher oil and gasoline prices, as well as to the slowly spreading broad impact of higher energy costs.  A gambling man would favor something on the plus-side of consensus expectations. 


Looking at last Friday - there we have it the steady pattern of daily higher-lows and higher-highs continues; the S&P 500 finished higher on Friday by 0.67%.  Friday’s MACRO tailwind was the better than expected wholesale inventories data, while the news concerning Greece seems to be mere distraction.  For the 6th day in a row all sectors are positive on TRADE and TREND, and all sectors closed higher on the day.


February wholesale inventories are better than expected up 0.6% vs. consensus at 0.4%. The inventories data provided more support for the idea that the economy is getting stronger. The January Wholesale Inventories number was revised to +0.1% from (0.2%).  The February Inventories/Sales ratio was 1.16; same as last month and lower than the year-ago reading of  1.38.


Today, Greece continues to generate headlines as Euro-region politicians said yesterday they would bail out Greece to the tune of $41 billion in loans; Greece is up 5% on the news. 


Last week, the best performing sectors were Financials (XLF), Consumer Discretionary (XLY) and Energy (XLE).  The XLE was the best performing sector on Friday.  Dollar weakness provided some support for the REFLATION trade as oil fell 0.55% on the day.  Chevron and ExxonMobil provided leadership, with the S&P 500 coal index up 1.2%.  Despite a weaker dollar, Materials (XLB) was the worst performing sector on the day. AA was down 3.2% after a downgrade by JPM ahead of earnings on Monday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.68) and sell Trade (81.77).


The Hedgeye Risk Management models have levels for the VIX is: buy Trade (15.84) and sell Trade (17.42).


In early trading, crude oil is looking higher on strong demand from China and a weaker dollar.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (82.69) and Sell Trade (87.63). 


In early trading gold is trading at a 4 month high.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,131) and Sell Trade (1,169).


The river card on the move in copper is in! Copper is trading at the highest level since the collapse of Lehman Brothers in September 2008; Imports of copper and products by China were 456,240 tons last month vs. 322,280 tons in February (up 42%) and 22% more than in March 2009.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.54) and Sell Trade (3.63).


In early trading, equity futures are trading above fair value as markets react positively to news of an EU support package for Greece.  Today's MACRO data points are light, but Alcoa kicks off the Q2 reporting season after the close.  As we look at today’s set up the range for the S&P 500 is 17 points or 1.1% (1,181) downside and 0.3% (1,198) upside. 


Howard Penney

Managing Director