Starboard Value Buys MGM Resorts Shares, Might Sell Macau Casinos
The New York Post reports a hedge fund could buy enough shares of MGM Resorts to get a seat on the board, then force the Las Vegas casino company to divest itself of its lucrative Macau casinos. Starboard Value, described by Motley Fool as an activist investor, recently bought $500 million of MGM Resorts stock and plans on adding more.
If Starboard’s plans succeed, the Las Vegas corporation would sell its two casinos in Macau, MGM Cotai and MGM Macau, in order to focus on the Las Vegas gaming market instead. The plan also would include merging MGM Resorts’ real estate investment trust with Caesars Entertainment’s own real estate investment spinoff.
MGM’s Macau revenues represent about 20% of the company’s yearly revenues (17% this year). That equates to $2 billion in revenues each year.
Wynn Resorts China
While MGM Resorts does not lean on its China holdings the way Las Vegas Sands Corp does, its Macau casinos provide MGM Resorts with diversification. When the US casino industry takes a downturn, the Macau sector provides a second important source of revenue.
Starboard Value believes Macau’s growth is slowing. Growth this year was 17%, but that is less than it was year-to-year from 2016 to 2017.
Other gaming analysts would note that 2016 was the end of a 26-month economic downturn in Macau due to Xi Jinping’s crackdown on corruption, but Starboard believes it is a sign of general slowdown.
2020 Casino License Renewals
Other reasons exist to fear the Macau gaming market. For instance, 2020 is the year when the casino licenses for all the US gaming companies in Macau (Wynn, MGM, LVS). These companies which have invested billions in the Macau gaming market could see those investments come to naught at the whim of the Chinese government.
No one sees Macau officials pulling casino licenses, but Macau officials have limited gaming table allotments to multi-billion dollar casinos based on Xi Jinping’s advice to diversify the Macau economy. Several acts have shown an ambivalence to the casino industry, including development of Hainan Island as a casino destination, the closure of poker rooms in Macau (due to official sanction), limitations on tourist visas, crackdowns on UnionPay credit card transactions, and smoking bans.
The opening of casino gambling in Japan also could siphon off casino visitors, even if Macau officials renew casino licenses. Japan plans to license 3 casino operators in 2019 for world-class integrated resorts to be opened in Tokyo, Osaka, Yokohama (or Chiba) by the year 2023.
Japanese Casino Competition
Japan will be the third largest casino market in the world, behind only the United States and China. Given the newness of the resorts, Asian gamblers naturally will flock to the Japanese casinos. Many might prefer to gamble in Japan on a permanent basis.
China’s economy also appears to be slowing down. That could have a major effect on the mass market and VIP sectors in Macau. If the Chinese middle class sees the tremendous growth of the past 20 years slowing down, they might save more of their disposable income. The same goes for conspicuous consumption of Chinese high rollers, in an era when their spending habits brings unwanted attention.
Will Wynn Resorts Leave Macau?
The four major US casino companies’ shares have fallen this year, but that is as much an indication of Las Vegas’s slowdown as it is Macau’s. As several financial analysts stated, focusing solely on the United States gaming market seems shortsighted, despite the reasons for being cautious with Macau. Despite its downturn since 2014, Macau gaming revenues are growing faster than Las Vegas’s revenues and Macau already is the world’s largest casino destination — by a long shot.
The conventional wisdom is the rumors about Starboard Investments buying their way on to the Wynn Resorts board in order to get out of Macau are just that — rumors. Unless Wynn Resorts wins a Japanese casino license — and it’s the only one of the four Las Vegas Strip giants not linked to Japan — it hardly makes sense to deal itself out of the world’s largest gaming market.