Snow Lake Capital Presses MGM to Sell 20 Percent of China Business

Posted on: January 6, 2021, 08:30h. 

Last updated on: January 6, 2021, 11:12h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Sean Ma’s Snow Lake Capital Ltd. is urging MGM Resorts International (NYSE:MGM) to sell 20 percent of the Macau business. They suggest the stake go to a “leading” Chinese consumer internet or travel and leisure company to unlock shareholder value. The corporation is the largest institutional investor in MGM China Holdings (OTC:MCHVF).

MGM Snow Lake
MGM Grand Macau, seen here. Snow Lake Capital is pushing MGM to sell part of the China unit. (Image: Bloomberg)

Ma pitched the idea to the US-based company’s board in a letter dated today. He noted his Hong Kong-based investment firm owns 285.4 million common shares of MGM China, equivalent to 7.5 percent of the shares outstanding. Snow Lake upped its stake in the operator of two Macau integrated resorts late last year.

As discussed previously with MGM Resorts International Chief Executive Officer William Hornbuckle, we believe such a transaction will create a win-win transaction for all parties involved and deliver significant shareholder value to both companies,” writes Ma.

The investor highlights several reasons why it would be in MGM’s interest to consider his idea, including the renewal of gaming licenses in Macau, which is slated for 2022.

Ma believes a new strategic investor “will bring significant non-gaming resources to both MGM China and Macau,” traits authorities there are looking for as an avenue for diversifying the special administrative region’s (SAR) gaming-dependent economy.

The Mandalay Bay operator owns 56 percent of the China business and often highlights that stake as a potential monetization chip should it need cash.

Interesting Timing

Snow Lake’s approach to MGM to reduce its Macau interest comes as the Las Vegas-based company is attempting to acquire Entain Plc (OTC:GMVHY), its partner on the BetMGM venture, for $11.06 billion.

Entain rejected that offer, as it did with a $10 billion bid MGM reportedly floated last year. The company says the overture undervalues the British bookmaker. The Bellagio operator said it’s possible an alternative cash component could be added to the proposal, and Snow Lake’s Ma is capitalizing on that talk in his pitch to the company.

“The MGM China stake provides MGM Resorts International financial flexibility to pursue mergers and acquisitions in the secular growth market of online sports betting and gaming,” said the investor.

Ma’s approach to MGM arrives a day after research firm Bernstein said that if the casino operator is successful in its quest to acquire Entain, that deal could prompt the buyer to step back from its Asia ambitions. It’s a move that could possibly include a reduced role in the effort to open an integrated resort in Osaka, Japan, and divesting its MGM China interest.

If the Entain marriage “were to be consummated, we would expect MGM [Resorts] to eventually bow out (or take a much smaller role) of a Japan integrated resort development, which has been plagued by delays (partly due to Covid-19) and by concerns around cost,” according to Bernstein analysts.

That research firm said MGM bowing out of Macau isn’t a near-term possibility. But it could happen with time if the operator looks to focus on digital gaming.

Time to ‘Rerate’ MGM China Stock

Snow Lake’s Ma argues that MGM selling 20 percent of its Macau arm to a Chinese company would trigger a rerating of the stock, which currently trades at steep discounts to local rivals.

Meanwhile, Wynn Macau and MGM China EV/2019 EBITDA valuations are at the bottom of the sector and trading at a significant discount to their local peers,” said Ma in the letter.

“The new 20% strategic Chinese partner will significantly enhance MGM China’s outlook of securing a new concession in 2022, triggering a rerating of the stock. If MGM China trades to just the sector average of 11.6X EV/2019 EBITDA, the upside is 13 percent, and if it trades to Galaxy’s multiple of 13.4X, the upside will be 32 percent.”

Ma came prepared in his approach to MGM, mentioning Huazhu Group, Meituan, Sunac China Holdings, and Trip.com as “suitable candidates” for purchasing 20 percent of the American company’s equity in the Chinese gaming firm.

Under Ma’s proposal, MGM Resorts would remain the largest shareholder in the China business, even if it sells 20 percent, while Pansy Ho would still be the second-largest holder, followed by the new strategic investor in the third spot.