MGM China deal leaves Wall Street confused

MGM Resorts International has acquired more shares in its China unit in a deal with Pansy Ho valued at about $325 million. Ho will acquire 4 million shares in the Las Vegas-based parent company, increasing her ownership to 4.8 percent. 

According to a statement, the transaction lets MGM increase its stake in MGM China Holdings from 51 percent to 56 percent. The company will pay Ho’s holding company $100 million, give her about $175 million in stock and spend $50 million in deferred payments in lieu of the dividends she would have received for holding the shares. 

Pansy Ho, the daughter of gambling mogul Stanley Ho, has been MGM’s partner in China for more than a decade, and this deal will let her diversify her holdings beyond the country. 

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"In our view, MGM Resorts is inexpensive and MGM China is trading at top of the range multiples, on our forecasts, with meaningful ambiguity in future results given the wave of new supply in a questionable top line recovery environment," said Carlo Santarelli, an analyst at Deutsche Bank. "In a period in which we view domestic gaming fundamentals favorably, MGM is using its equity to grow its Macau position, a market where we struggle with fundamentals."

A Mess in Macau

MGM and Ho are taking cautious steps toward opening a second casino in Macau—a Chinese territory that has weathered a significant downturn after a government crackdown on corruption and graft. During some months over the past two years, gaming revenue in Macau dropped by more than 50 percent compared with the year before.

The $3.1-billion MGM Cotai’s opening was pushed back this month to the second quarter of next year—at least the third time it’s been postponed. 

While Macau's gaming economy is on the mend, the deal is reportedly making Wall Street question "a recent, fragile sense of stability" in the territory. The deal, which "seems to only serve Ho," gives her exposure to U.S. real estate at a time when Macau's recovery is tentative at best.

Talking with Business Insider, Wells Fargo's Cameron McKnight noted that MGM already has control of MGM China. "We don't see any immediate benefit from purchasing another 5 percent—especially when Macau's fundamentals are still challenged and the tone of many of our industry conversations is 'very glum,'" McKnight said.

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