MGM Acknowledges Anxious Activist Investor, But Imminent China Stake Reduction Unlikely

Posted on: January 6, 2021, 08:31h. 

Last updated on: January 7, 2021, 09:45h.

MGM Resorts International (NYSE:MGM) has confirmed it received a letter from Snow Lake Capital Ltd. founder Sean Ma. But the gaming company isn’t rushing to trim its stake in MGM China Holdings (OTC:MCHVF), per the investor’s suggestion.

MGM Snow Lake
MGM’s Mirage on the Vegas Strip. The company isn’t rushing into selling its China stake. (Image: YouTube)

In a letter to the Aria operator’s board, Ma, whose firm controls 7.5 percent of MGM China shares outstanding, urged the Las Vegas-based gaming company to consider selling 20 percent of the Macau business to a Chinese consumer internet or travel and leisure firm, even going so far as to mention four credible candidates.

Snow Lake, a Hong Kong-based money manager, owns 285.4 million common shares of MGM China. He believes the US-based parent can unlock value for shareholders by trimming its stake. He also claims that onboarding a Chinese partner would appease authorities ahead of the 2022 Macau gaming license renewal process.

For now, MGM is taking the overture under advisement, but appears unlikely to dramatically reduce its interest in the China operation over the near-term.

MGM Resorts remains committed to Macau and will continue to take actions that are in the best interests of its shareholders and stakeholders,” the company said in a statement. “We appreciate continued constructive engagement with MGM China shareholders.”

The Mirage operator owns 56 percent of the Macau unit and frequently touts that stake as an asset that can be monetized should the parent company need cash. However, MGM’s balance sheet is stout, featuring $5.9 billion worth of liquidity.

Analyst Concurs: Don’t Bet on Sale Soon

Ma brings up some compelling points. He notes cash raised from a 20 percent sale of its MGM China shares could help the company fund other large-scale projects, including an integrated resort in Osaka, Japan.

The Snow Lake founder also points out that MGM could use the proceeds to forge ahead with its attempted acquisition of Entain Plc (OTC:GMVHY). Entain, MGM’s partner on the BetMGM business, turned back an $11.06 billion offer earlier this week and the suitor acknowledges as much. But MGM also noted it may reconfigure the offer to include cash from IAC/Interactive, its largest shareholder.

Without a burning need for the cash a stake sale would bring in, and with Macau stocks still feeling the effects of the coronavirus pandemic, MGM probably wouldn’t entertain Snow Lake’s idea “anywhere close” to where MGM China shares currently reside, according to JPMorgan analyst Joseph Greff.

Shares of the MGM Cotai operator would need to nearly double to reclaim the 2018 highs, and while that’s not necessarily a requirement to consider trimming its position in the Macau unit, it could be hasty of MGM to scale back its China exposure today.

Other Ideas

Greff, the JPMorgan analyst, says that for MGM to pull back from Macau “at these levels is premature, in our view, to drive incremental equity value.”

Of course, that doesn’t jibe with Snow Lake’s wishes. The investment firm believes the introduction of a Chinese internet company into the MGM China fray would benefit shareholders.

Should MGM need more capital, it can get that without sacrificing Macau upside by further reducing its interest in MGM Growth Properties (NYSE: MGP), its primary landlord in the US. Last year, the casino operator sold $1.4 billion worth of the MGP units it held. But it still owns 53 percent of the real estate company.