Rise in proxy battles indicates vulnerability in gaming industry

A decade ago, activist hedge funds had $10 billion invested in proxy fights that sought to influence board elections, switch out management or change a business’s direction.

Today, the figure is estimated to have grown to $215 billion.

“The sharks are looking for blood in the water,” said attorney Clifford Neimeth, a Greenberg Traurig shareholder and a specialist in corporate securities law.

He said proxy battles — in which shareholders are persuaded to join forces and gather proxies to win a stockholders vote — are responsible for up to 65 percent of the current mergers and acquisition activity in corporate America.

The gaming industry is not immune. Since 2013, International Game Technology, Wynn Resorts Ltd., Pinnacle Entertainment, MGM Resorts International and others have been embroiled in proxy battles. The fight can drain companies of millions of dollars in staff time and outside legal and public relations expenses.

“They can be a huge time-suck for management and a distraction,” Credit Suisse gaming analyst Joel Simkins said. “There are often emergency board meetings that take away valuable time from running the business. Often times, it becomes a burden from a legal perspective.”

The question surrounding proxy actions is whether they address a valid concern of shareholders or interested parties or are merely nuisance lawsuits.

“The challenge is to create credibility,” Simkins said.

Neimeth, who has offices in New York and Phoenix, said many corporations eliminated anti-takeover protections over the past few years, making them vulnerable to proxy activities.

Activist investment groups have also become savvier. Many hedge funds employ investment bankers and researchers dedicated to weeding out a business sector’s weakest or poorest performing firms.

“You have about 10 to 15 serial activists who have the capital and the time to evaluate targets,” Neimeth said. “A lot of companies aren’t well-prepared for this type of activity.”

Investor Jason Ader, who co-heads New York-based SpringOwl Asset Management, said certain hedge funds were “the best performers” within the investment community in the past few years.

The former Wall Street gaming analyst speaks from experience. He led a proxy fight against slot machine giant IGT in 2013, winning one seat on the company’s board out of the three he sought.

Last year, Ader landed a seat on the board of European online gaming operator Bwin.party after launching a proxy challenge. He is working to facilitate a sale of the company, which he considers to be underperforming.

“There is no question this activity will continue,” Ader said.

A LIKELY PREDETERMINED OUTCOME

MGM Resorts learned the outcome of its proxy battle with New York-based Land and Buildings Investment Management before the casino operator’s annual shareholders meeting at Bellagio this Thursday.

Land and Buildings pulled its proxy last week, all but admitting it was in a losing fight.

Land and Buildings, which owns less than 1 percent of MGM’s outstanding shares, wanted to convert a portion of the casino operator into a real estate investment trust and replace four of the company’s board members with its own slate of candidates.

Independent proxy advisory firm Institutional Shareholder Services dismissed Land and Buildings’ bid and suggested stockholders support the company. A second advisory firm, Glass, Lewis & Co., issued a positive report on MGM Resorts, but said shareholders should vote for just one of Land and Buildings’ board candidates.

Meanwhile, MGM’s largest individual shareholder, Los Angeles-based Tracinda Corp., said May 1 that it would vote its 19 percent stake in favor of the current company’s board. Tracinda is the investment arm of billionaire Kirk Kerkorian, MGM’s founder.

Land and Buildings founder Jonathan Litt said in a statement he thought the proxy challenge brought about some change to MGM’s corporate governance.

Simkins, however, was dismissive of the proxy, saying the investment group was wrong in its assessment of MGM’s financial performance.

He also said a REIT structure might not be the best model for MGM Resorts.

“I think their assumptions were a bit aggressive,” Simkins said.

Several Wall Street researchers said Litt, who was critical of MGM CEO Jim Murren’s leadership, had virtually zero gaming industry experience.

On the company’s quarterly earnings conference call, Murren said the Land and Buildings’ effort “devolved into a tabloidlike campaign and it shouldn’t happen.”

Ader, who is also an independent member of Las Vegas Sands Corp.’s board, doesn’t believe the REIT structure suits the casino industry. He said the concept was a “short-term solution” and a way for investors “to make a quick buck.”

Long term, Ader said, there would be inherent conflicts between the REITs and the casino operators. He also didn’t believe MGM Resorts was underperforming.

“I think ISS got that one right,” Ader said of the advisory firm’s report favoring MGM.

Neimeth said hedge funds view real estate as unlocked potential.

“There is $2.5 trillion in real estate sitting on balance sheets,” Neimeth said.

MIXED RESULTS

Gaming industry proxy battles have seen varied results.

Ader, who controlled a 5 percent stake in IGT, gained just the one board seat. But he came to an agreement with the company six months after the shareholders vote. IGT paid Ader $2.5 million to cover his expenses incurred in the fight in exchange for his agreeing not to invest in the company for four years.

Last fall, gaming industry veteran Dan Lee led a proxy fight to elect directors to Full House Resorts’ board. After gaining support from a large number of shareholders, Lee negotiated a deal to be named CEO and place his directors on the board.

In April, Elaine Wynn lost her highly publicized proxy fight to regain her seat on Wynn Resorts’ board. Despite a well-orchestrated campaign, the ex-wife of company chairman Steve Wynn garnered only 21 percent of shares voted. Even more telling was that 73 percent of her total vote came from shares she controlled and those owned by her ex-husband.

Pinnacle Entertainment was challenged in a proxy by hotel and restaurant workers union UNITE HERE over corporate bylaws on shareholder rights language and the company’s planned spinoff into a real estate investment trust.

Neimeth said it’s sometimes in a company’s best interest to reach an agreement early with an activist shareholder, such as exchanging a position on an expanded board or offering another incentive.

“It often behooves a company to settle,” Neimeth said. “It save times rather than dragging out a long and costly fight.”

Ader said the infatuation with REITs will fuel continued proxy battles in the gaming industry. Simkins speculated the recent proxy activity among gaming companies could present additional targets.

“There is a sense of vulnerability,” Simkins said.

Meanwhile, Michael Bonner, managing partner of Greenberg Traurig’s Las Vegas office, said corporations must be better prepared for proxy battles.

“They need to identify structural or legal weaknesses,” he said. “That’s one of the things companies can do better.”