MGM slumps on stock sale

William Chambers* Shares in MGM Resorts International slumped Wednesday after a slew of corporate announcements – including a preliminary trading update – from the Las Vegas-based gaming giant were released following market close the previous day. First, MGM said it intends to sell 40.9 million worth of shares as part of its efforts towards paying off a US$1.1 billion (MOP8.8 billion) bank loan due in 12 months time. The firm added that major shareholder and billionaire Kirk Kerkorian plans to sell a further 27.8 million shares through Tracinda, his privately-held investment business, which would bring Kerkorian’s stake in MGM to under 30 percent. MGM would not receive any proceeds from Tracinda’s sale, but its own US stock offering is expected to generate over US$500 million, with a further 6.1 million shares on offer from the company in case of over-allotment possibly pushing the gain closer to US$600 million. On Wednesday, MGM listed the offered stock at a price of US$12.65, below the current market valuation, as shares in the company dropped nearly 10 percent in morning trading from the previous day’s closing price of US$13.61. MGM’s stock offering is the latest in the company’s efforts to bolster its balance sheet while it bets on growth in Las Vegas, through the CityCenter complex on the Strip, and Macau, where it operates the MGM Grand Macau alongside a local partner, Pansy Ho. In another major announcement Tuesday, MGM said it has now received an offer that “equates to slightly more than US$250 million” for its 50 percent stake in the Borgata Resort & Spa Casino in Atlantic City. The offer, from an unnamed company, has been referred to MGM’s partner in the venture, Boyd Gaming. Boyd has the right of first refusal on MGM’s stake in the Borgata. It can either attempt to match the offer to take 100 percent ownership of the resort or work with the new partners. Analysts expect the firm is more likely to take the latter option. If and when the Borgata sale goes through, MGM will benefit to the additional tune of US$114 million from joint venture earnings distributions that are currently being held in a trust account until the company’s 50 percent stake is sold. MGM has already confirmed its intention to sell extra parcels of land associated with the Borgata resort, and the gaming giant announced further on Tuesday that it expects the land sales to bring in US$71 million during the fourth quarter of this year. Tuesday’s announced stock sale marks a continuation of MGM’s efforts to recapitalize its business after the weight of financing CityCenter, at a time of a significant slump in revenues for Nevada’s casinos, brought the company almost to the verge of bankruptcy in early 2009. The Borgata sale is more specifically linked to MGM’s operations in Macau, however, as MGM’s hand was effectively forced when New Jersey’s gaming regulators refused to sign off on the company’s partner and daughter of Macau gambling kingpin, Stanley Ho. The Borgata sale has been seen as a clear and decisive move by MGM to sacrifice its limited New Jersey interests for the growth opportunities in Macau’s booming casino sector. At the end of last month, MGM announced it would list its Macau unit in an IPO which is forecast to raise around US$400 million. And MGM also said Tuesday that it expects US$125m in loan repayments from its Macau venture, MGM Grand Macau, to feature in its third quarter results when published in the coming weeks. Analysts said they believed MGM’s corporate dealings now meant the firm would be in a position of relative strength even if the Las Vegas market continued to struggle back to life. “We feel strongly that MGM will be positioned to address capital needs through 2013 without the benefit of an economic upturn,” said Bill Lerner of advisory group Union Gaming. There were indications earlier this month that conditions on the Las Vegas Strip are indeed improving following a jump in revenues across Sin City’s entire casino sector in the month of August. Still, in a preview of third-quarter results to accompany news of the stock listing Tuesday, MGM said it nevertheless expects to make a loss of US$206 million in the third-quarter compared to US$963 million in the same period last year, as operating results are again set to be affected by impairment charges. The company said its “construction completion guarantee obligation” has increased by US$232 million on the burdensome CityCenter development and that it expects to incur a US$182 million impairment charge from the project in the third quarter. Additionally, the company expects to take a US$128 million pre-tax impairment charge on the sale of its stake in Borgata. Third quarter net revenue, excluding reimbursed costs at CityCenter, is expected to be down 3 percent year-on-year to US$1.47 billion in the third quarter, MGM said. *Gambling Compliance/Macau Business