Macau casino concessionaire Melco Resorts & Entertainment has been encouraged to complete a full buyout of Studio City International Holdings and merge with parent Melco International Development in a bid to unlock shareholder value and remove risks around its US NASDAQ listing.
In a Thursday note from brokerage Bernstein, described as part of a series examining potential corporate actions to unlock shareholder value, analysts Vitaly Umansky and Louis Li note that Melco is the worst performing Macau stock so far this year, in part due to US investor concerns around de-listing.
The de-listing issue related to new regulations adopted by the US Securities and Exchange Commission (SEC) in January which stipulate, among other things, that audits of listed companies must be conducted by firms subject to inspection by the US Public Company Accounting Oversight Board (PCAOB). Melco has been included on a list of foreign companies whose auditor does not qualify, meaning it will be given a three-year countdown to find a solution or delist. Studio City has also been named.
In Thursday’s note, Bernstein said a full acquisition of Studio City and merger with the parent would solve a host of issues, including that of its US listing status.
By completing a buyout of Studio City – of which it already holds a controlling 55% stake, Melco would simplify its corporate and capital structure, improve Studio City’s operational performance, reduce cost of capital, and eliminate the risk of Studio City being de-listed itself or being deemed a “satellite casino” under proposed changes to Macau’s gaming law.
“Such a transaction would lead to re-rating in Melco valuation (via increase in Studio City multiple and EBITDA enhancement) and add over US$2 of shareholder value to our price target.”
Risk of a US de-listing could then be eliminated completely by merging with Melco International Development, which already owns 55.8% of Melco Resorts. This, the analysts write, would further simplify the group’s corporate structure and solve the problem of a bifurcated US/Asian Investor base, likely leading to a re-valuation of Melco.
“We estimate ~US$1 per share of value on top of the US$2 from the Studio City buyout,” they state, outlining a price target of US$12.20 – more than double its overnight closing price of US$5.78.
“Executing both transactions could deliver a valuation of over US$15, broaden the investor base, and de-risk the stock.”
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