MGM Macau IPO Spells Trouble

MGM Resorts (NYSE: MGM  ) will likely be joining its casino brethren in launching a Macau IPO, cashing in on gaming's biggest market. This will be the third Macau IPO after Wynn Resorts (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) sold shares last year to reduce debt. But this one could be just another desperate attempt to lower the debt threatening MGM's very existence.

A tad more than $13 billion of long-term debt was on MGM's balance sheet at the end of the quarter, much of it because of the ill-timed CityCenter project. At a time when Wynn and Las Vegas Sands have been reducing leverage by paying down debt, MGM has been in a holding pattern as results in Las Vegas continue to struggle.

Company

2Q 2010 Long-Term Debt

2Q 2009 Long-Term Debt

Change in Debt

MGM Resorts

$13.05 billion

$12.98 billion

0.5%

Las Vegas Sands

$9.83 billion

$10.64 billion

(7.6%)

Wynn Resorts

$3.23 billion

$4.12 billion

(21.6%)

Source: SEC filings.

The foundation of problems at MGM were laid years ago when it focused on finishing City Center in Las Vegas while Las Vegas Sands, Wynn and Melco Crown (Nasdaq: MPEL  ) were expanding in fast growing Asia. Those three have enjoyed vastly improved results this year as Chinese visitors gamble more and more each year.

Last year MGM sold Treasure Island and is attempting to sell its stake in Borgata Resort & Casino in Atlantic City to please state regulators. If MGM keeps selling, eventually there will be no properties left to generate cash and pay for the debt piling up. The Macau IPO is expected to raise up to $500 million, a drop in a $13 billion bucket for MGM.

In coming quarters, MGM Resorts has a lot to prove to investors by reducing debt and getting Las Vegas operations back on solid footing. Count me as a skeptic staying far away from MGM's shares until I see a lot of improvement.

What do you think about the future of MGM? Leave your comments below.

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Fool contributor Travis Hoium is long shares of LVS and short LVS call options. Melco Crown Entertainment is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2010, at 10:12 AM, MutualFundMonday wrote:

    MGM is on life support and the recent price action is only a short covering rally while the Fed pumps money into the market. Also note that the $500M estimate for the IPO is at the high end and MGM would have to split 50% with the joint venture partner Pansy Ho. Also, there is the likelihood that they only raise $350M total for both partners as well as the fact that money is SUPPOSED to be used for future development on the Cotai Strip in Macau. Neither helps MGM's debt situation and Pansy Ho wouldn't be IPO'ing just to alleviate her partner's U.S. debt problem. I really only put a 50/50 chance the IPO even happens with the HK IPO market cooling down in the last year as well as the fact nobody is going to want to subscribe to an MGM IPO anyway.

  • Report this Comment On September 29, 2010, at 12:11 PM, spokanimal wrote:

    MGM and Sands are a study in contrast.

    MGM is Vegas-intensive, laden with debt, and just completed a huge, un-imaginative resort... citicenter.

    MGM will survive the current economic upswing but will be bankrupt before the end of the next recession unless they take extraordinary measures while the economy is good.

    Sands, on the other hand, is growing EBITDA exponentially in Singapore, where their marina bay resort could likely become the most profitable gaming resort in history. Similarly, Sands is the premier player on Macau's "cotai strip" where they control all but 2 center-strip parcels in what is becoming the epicenter of Macau gaming, which is itself the center of the gaming universe.

    In comparing MGM to Sands, you're looking at a comparison of the industry's worst to the industry's best.

    S.

  • Report this Comment On September 29, 2010, at 2:32 PM, MrCainThaler wrote:

    MGM will be fine. They've already used their cash flow to restructure their debt over three decades. Look at the maturity dates. Each year they owe about what they owe right around what they generate. A little more restructuring to bring that number below cashflow and they're in the clear. Meanwhile, their debt is up .5% because they performed this restructuring towards the end of 09 and begining of the current year.

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