Melco Could Boost Share Price with Studio City Acquisition, Parent Merger

Posted on: April 30, 2022, 12:51h. 

Last updated on: April 30, 2022, 05:52h.

Analysts believe Melco Resorts & Entertainment (NASDAQ:MLCO) could prop up its sagging share price by acquiring Studio City International Holdings (NYSE:MSC) and then merging with parent Melco International Development.

Lawrence Ho
Melco Resorts CEO Lawrence Ho in a 2015 interview in Macau. Bernstein says the company should buy Studio City. (Image: Bloomberg)

That take comes courtesy of Bernstein analysts Vitaly Umansky and Louis Li. In a recent research report, they note that the aforementioned transactions would unlock shareholder value while potentially steering the gaming company clear of losing its Nasdaq listing.

Shares of Melco are off almost 44% year-to-date and 70.35% over the past year. Those performances are significantly worse than those of rivals Las Vegas Sands (NYSE:LVS) and Wynn Resorts — the other two US-listed Macau concessionaires.

Bernstein rates Melco “outperform,” with a price target of $12.20, which is more than double the stock’s Friday closing price of $5.72. However, the research firm adds that if Lawrence Ho’s company completes the two aforementioned deals, the share price could jump to $15.

Good Reasons to Consider the Deals

Beyond creating shareholder value, Melco, though it hasn’t signaled it’s looking at the deals, has compelling reasons to consider buying out Studio City and merging with its international parent.

The City of Dreams operator already owns 55% of Studio City, which has also been mentioned by US regulators as a possible candidate for losing its New York listing. Not only would Melco streamline its capital structure with that acquisition, it’d likely be getting a good deal, as Studio City shares are down 71.44% over the past year.

Such a transaction would lead to re-rating in Melco valuation (via increase in Studio City multiple and earnings before interest, taxes, depreciation and amortization (EBITDA) enhancement) and add over US$2 of shareholder value to our price target,” note the Bernstein analysts.

Acquiring Studio City would also clarify that company’s ownership structure. That’s relevant because it’s currently considered a satellite casino operator, and under Macau’s new gaming laws, all satellite casinos must be owned by traditional concessionaires within the next three years.

By merging with Melco International, which already owns almost 56% of the gaming entity, Melco Resorts potentially eliminates delisting risk. That’s while possibly broadening its investor base, adds Bernstein.

Avoiding Delisting Could De-Risk Melco Resorts Stock

Delisting fears are popping up following passage of the Holding Foreign Companies Accountable Act (HFCAA) and ongoing geopolitical tensions between the US and China.

In fairness to Melco and Studio City, they’re joined by a slew of other Chinese companies trading in New York that could draw the ire of US regulators.

At issue for the gaming company is that the aforementioned HFCAA mandates that audits of foreign companies trading in the US be inspected by the US Public Company Accounting Standards Board (PCAOB). However, the PCAOB says it cannot evaluate Melco’s audits, which are conducted by Ernst & Young, in Hong Kong — the gaming company’s headquarters.

Bernstein previously said the casino operator has options, including listing in Hong Kong. The shares previously traded there. But that listing was abandoned in 2015, with Ho noting investors were partial to the company’s Nasdaq-listed stock.

Melco hasn’t publicly commented on buying Studio City or merging with its parent company. But it’s clear Bernstein sees positives in both potential transactions.