Big rewards in China create flexibility for MGM Resorts

7 March 2014

LAS VEGAS -- MGM Resorts International is showing investors what a 51 percent ownership stake in its publicly traded Chinese subsidiary means financially to the casino operator’s business back home.

At least $320 million this month alone.

The figure is MGM Resorts’ share of some $628 million in quarterly and special dividends that MGM China will award to shareholders this month. The business, traded on the Hong Kong Stock Exchange, owns the 582-room MGM Macau and is building the $2.9 billion MGM Cotai, which is expected to open in 2016.

Las Vegas-based MGM Resorts said it will use the proceeds to reduce its long-term debt, now at $13.4 billion.

But that’s just part of the story.

The Chinese company dividend offers the casino giant, which owns 10 Strip resorts, some financial flexibility as it expands its presence in Las Vegas and in emerging U.S. markets.

On the Strip, MGM Resorts is remodeling The Hotel next to Mandalay Bay into the Delano Las Vegas, a project that is expected to be completed by September. A retail, dining and entertainment district between New York-New York and Monte Carlo, and a redevelopment of the casinos’ Strip frontage areas, are expected to be completed by the summer.

Work is also progressing on the company’s $350 million sports arena behind New York-New York in partnership with sports and entertainment promoter AEG. The arena is expected to open in 2016.

MGM Resorts is also planning $800 million resort complexes in National Harbor, Md., and Springfield, Mass., both of which could greatly enhance the company’s presence in the populous Northeastern United States.

It’s not a wonder that Wall Street approved of the plans for dividend payouts.

Wells Fargo Securities gaming analyst Cameron McKnight told investors he had a positive view of MGM Resorts’ “growing dividend profile.”

MGM Resorts doesn’t have a large slice of Macau’s $45.2 billion annual gaming revenue pie with just one casino.

But the company’s Cotai project, which grew in cost by $300 million because of increased entertainment offerings, keeps pace with competitors Las Vegas Sands Corp. and Wynn Resorts Ltd, which are also building multibillion-dollar casinos on the Cotai Strip.

“MGM remains the most compelling way for investors to play a Las Vegas recovery paired with growth in Macau,” Credit Suisse gaming analyst Joel Simkins said. “We see MGM as an underappreciated midcap growth story with a balance sheet risk significantly mitigated relative to prior years.”

MGM Resorts Chief Financial Officer Dan D’Arrigo said the company expects the dividends from China to continue in 2014.

“We remain focused on further deleveraging our balance sheet by maximizing operating cash flows and from anticipated dividends received from MGM China,” he said.

MGM Resorts’ long-term debt is the industry’s second-highest, following the nearly $23 billion debt load carried by Caesars Entertainment Corp.

The difference is that Wall Street found MGM’s debt a manageable figure. The company took steps last year to address its leveraging issues.

D’Arrigo said MGM Resorts reduced debt in 2013 and has “prefunded” its only scheduled debt maturity for this year by “issuing the lowest interest rate senior unsecured notes” in company history.

MGM also refinanced the debt on CityCenter, the massive Strip complex in which the company holds half ownership.

“We have lowered its annual cash interest expense by approximately $80 million, further enhancing CityCenter’s future cash flow potential,” D’Arrigo said.

SIG - Susquehanna International Group, LLP gaming analyst Rachael Rothman said growing investor appreciation of the company’s Macau project, as well as plans in Maryland and Massachusetts, will become “catalysts” for MGM Resorts’ value on the New York Stock Exchange. The company’s stock price increased almost 100 percent in 2013.

Union Gaming Group Managing Director Bill Lerner said investors “haven’t fully appreciated” the Monte Carlo and New York-New York project, which he said would greatly enhance the long-term potential for both casinos.

Janney Montgomery Scott gaming analyst Brian McGill said MGM Resorts’ growth in Macau could be worth another $6 added to the company’s daily price per share. The dividends from the Macau operations that are brought home factor into MGM Resorts’ larger picture.

“At this point, we anticipate continued growth in Macau,” McGill said. “This cash can be used to pay down debt and for other investments.”

Related Links
SIG - Susquehanna International Group, LLP Gaming Vendor Information
MGM Resorts International Ownership Details


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