MGM Could Fetch up to $7 Billion in Sales of Bellagio, MGM Grand, Use Cash to Reduce Debt, Buyback Stock
Posted on: July 23, 2019, 12:58h.
Last updated on: July 24, 2019, 12:04h.
MGM Resorts International (NYSE:MGM) could command $6 billion to $7 billion, before taxes, if it sells the Bellagio and MGM Grand on the Las Vegas Strip, according to Macquarie analyst Chad Beynon.
News broke last week that MGM, the largest operator on the Strip, is considering selling those two venerable Sin City properties in sale-leaseback transactions, meaning another company would acquire the real estate while MGM would continue operating the casinos and entertainment options located at the venues.
The company is reportedly open to selling Bellagio and MGM Grand in separate deals or as part of a package. Beynon estimates that if both properties are sold, MGM could wind up with as much as $5 billion to $6 billion on an after-tax basis.
We believe the motivation behind any potential transaction would be to deploy capital towards share deleveraging and share repurchases, in order to set its sights on 2020 estimate free cash flow per share of $3.50,” said the analyst in a note provided to Casino.org.
Beynon believes the Luxor operator could use some of that $5 billion to repurchase more than 100 million of its shares. Or the company could pare its debt burden, which was reported at $15 billion earlier this year, the largest among the four biggest domestic gaming companies.
‘Outside The Family’
MGM Growth Properties LLC (NYSE:MGP), the real estate company separated from MGM in 2016, makes for a practical buyer of any assets the gaming firm is looking to sell. The real estate entity owns several Las Vegas properties run by MGM, including the Excalibur, the Luxor, Mandalay Bay, and the Mirage as well as such regional venues as MGM Springfield and the Borgata in Atlantic City.
The last time MGM did a sale-leaseback transaction was late last year when the company landed $637.5 million from MGP to “reposition” Park MGM and NoMad Las Vegas, formerly the Monte Carlo Hotel and Casino. When it comes to selling Bellagio and MGM Grand, the owner could be looking to buyers beyond MGP to command a more attractive price tag.
“We believe MGM may be looking ‘outside the family’ for a higher multiple, which would make a sale accretive,” said Beynon.
The analyst called Bellagio and MGM Grand two of the “most prominent wholly-owned assets left on the Strip.” MGM Resorts also owns Circus Circus and 50 percent of CityCenter, including the Aria and Vdara.
Strip casinos rarely come up for sale and are highly sought after, meaning MGM Resorts could find plenty willing buyers beyond MGP.
Beynon estimates that if the gaming company can command $5 billion to $6 billion after taxes in sales of Bellagio and MGM Grand, approximately $2.2 billion of that figure would go toward reducing debt with the remainder dedicated to share buybacks.
The firm has 540.4 million shares outstanding and the stock trades just over $29 at this writing. In a hypothetical example, MGM could reduce its share count by more than 100 million by allocating $3 billion to repurchases and buying stock in the $29 to $30 range.
Even if the casino operator does not reduce its share count by that much, increased buybacks could be viewed positively by investors because the company has lagged rivals when it comes to capital allocation.
“We believe others in the space historically have had better capital allocation,” said Beyon. “In 1Q17, MGM implemented a dividend (2% yield) and in 3Q17, implemented a share repurchase plan. With no M&A strategy and ramping free cash flow, MGM plans to judiciously return capital to shareholders.”
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