On the surface, it appears that Lawrence Ho’s Melco Resorts & Entertainment has taken a beating on this week’s disposal of its 9.99% stake in Crown Resorts to American private equity and hedge fund giant The Blackstone Group. But scratch the surface, and there’s more to this than initially meets the eye.
The transaction, which saw Melco sell all 67,675,000 shares it held in Crown for just over AU$550 million (US$358 million) at AU$8.15 per share, represented a substantial discount on the AU$880 million (US$573 million) the company paid Crown major shareholder James Packer to acquire the holding at AU$13.00 per share last June – a loss of around AU$330 million (US$215 million) in just 10 months.
While waving goodbye to such a sum is no laughing matter, in the current uncertain business environment one can only roll with the punches as they are thrown, and in this case it appears Ho has chosen to lose a battle in order to focus on winning the war. From Melco’s perspective, that war is being waged on multiple fronts.
With an inquiry by the NSW Independent Liquor and Gaming Authority into Melco’s suitability to hold a casino license in the state now certain to be called off, we will never know whether Ho’s decision came down to concerns over potential reputational damage a negative ruling (or even just information emerging from the inquiry’s proceedings) may have cast over his company’s much grander global ambitions – particularly as they relate to Japan. While Melco has passed probity in the past, the Australian media, legal and political establishments are notorious for having significant elements which are rabidly anti-gambling – with a healthy dose of xenophobia thrown in for good measure – making it arguably difficult for Melco to get a fair hearing.
What we do know is that Melco is currently bleeding somewhere in the vicinity of US$3 million per day, even after its recent cost containment measures, while its Macau casinos remain all but empty – with no clear signs of exactly when the situation might improve. An injection of US$358 million cash right now certainly provides extra breathing room. And it should be noted that Crown Resorts stock was trading as low as AU$6.00 just six weeks ago. A sale at that price would have seen a result almost US$100 million worse for Melco.
The transaction also sends a message to the market that Melco is being fiscally responsible at a time when gaming and hospitality firms the world over are facing major uncertainty. Ho stated in February, when Melco announced it was abandoning plans to acquire a second 9.99% stake in Crown Resorts, that the company would reassess all non-core assets in 2020 and if nothing else Wednesday’s divestiture lives up to that promise. Cutting his losses may well prove to be the prudent decision in the long run.
Further adding to that fiscally responsibility was Melco’s announcement on Wednesday evening (Macau time) of its signing of a senior facilities agreement with a syndicate of banks making US$1.92 billion in revolving credit facilities available. While US$1.75 billion of the funds will be used to refinance existing debt, the agreement provides an option for a further incremental facility of up to US$1 billion, potentially providing Melco with US$1.17 billion in additional liquidity, thus shoring up its existing operations and even contributing to a “Japan war chest,” if needed.
Perhaps less impressed with the Blackstone transaction will be Crown Resorts itself. Although a silent witness to Ho’s original deal with Packer last year to acquire almost 20% of the company, the presence of its new shareholder promised to provide a significant boost to the company’s VIP business: VIP turnover alone at Melco’s flagship Macau property City of Dreams in 2019 was US$56 billion – more than double Crown’s entire group-wide turnover of around US$25 billion for the same period.
Of course, the clear winner in all of this is Blackstone, whose acquisition of Melco’s 9.99% stake in Crown at AU$8.15 per share is at a significant discount to Crown stock’s persistently fixed trading range of AU$10 to AU$14 over the past five years. Blackstone can reasonably expect the value of its new stock to significantly climb in value as the impact of COVID-19 eases.
In the meantime, while it may not be the outcome he ultimately desired, Lawrence Ho may well sleep better tonight with more cash in the bank and fewer outside distractions to deal with.
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