Infighting Boosts Wynn Resorts

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The battle between Wynn Resorts' (Nasdaq: WYNN  ) two co-founders has become front-page news and it only seems to get more bizarre for the gaming operator. A feud that began over a gift given to a university in Macau has now led to a forced buyout of Kazuo Okada's shares and likely a legal battle. Let's retrace the company's steps to show how this situation may impact investors.

How it went down
In January, Steve Wynn's money man, Kazuo Okada, sued the company for refusing to let him review business accounts and information about a $135 million donation Wynn gave to a university in Macau. This brought to light underlying issues Steve Wynn and the company's board had with Okada building a casino resort in the Philippines, without Wynn Resorts. At that time the company had been investigating Okada's efforts in the Philippines for nearly a year. In a report to the board, an investigator said Okada had paid expenses for Philippine regulators to visit Wynn casinos.

After the report was filed with the board and Okada filed suit against Wynn, the wheels were in motion for his ouster. Since Okada is a director and major shareholder, the company has the option to buy back shares at fair value if it feels he is unsuitable to own shares of the highly regulated company. The kicker is that the company can wait 10 years to pay the shareholder, paying only 2% interest per year. His shares, holding a market value of $2.77 billion, were deemed to have a fair value of $1.9 billion by the board. Talk about a kick in the pants on the way out the door!

What happens next
Okada will file a restraining order to stop the share redemption, according to reports, and we may be in for a long legal battle here. None of this will impact operations in the meantime, but it will hang over shares. Las Vegas Sands (NYSE: LVS  ) has had similar accusations of corrupt foreign practices. The investigation and court battles haven't seemed to hurt the company's operations competing against MGM Resorts (NYSE: MGM  ) , Wynn Resorts, and Melco Crown (Nasdaq: MPEL  ) in Macau. But they did impact shares when they were first announced, so the next week may be choppy.

What Wynn investors may want to be more concerned about is an SEC investigation into the Macau gift. The SEC is also looking into it, and when the SEC is snooping around your country it's never a good thing.

What it means for you
The good news for shareholders is that Okada's shares will be purchased at a steep discount, essentially increasing the value of the other shares outstanding. Okada won't be paid for 10 years, and there is little doubt that Wynn Resorts will have ample cash to pay off the $1.9 billion buyout price at that time. Wynn's balance sheet is strong enough to handle such a large buyback, unlike competitors MGM Resorts and Caesars Entertainment (Nasdaq: CZR  ) , which are drowning in debt.

The bad news is the cloud of uncertainty this leaves for investors. There's nothing investors hate more than uncertainty, and when a co-founder sues a company, is forcibly bought out, and files a restraining order of his own, you know it's not good.

We don't know exactly what the market's reaction will be over the next few weeks, but I think this is actually a good thing for Wynn Resorts long-term. As I said last week, I like Wynn's value right now, and if shares do drop because of any overhang from lawsuits or an investigation, I may be looking at buying.

Interested in reading more about Wynn Resorts? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (6) | Recommend This Article (3)

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 February 21, 2012, at 5:20 PM, MutualFundMonday wrote:

    "I think this is actually a good thing for Wynn Resorts long-term."

    "Come on man!" Travis, did you think this through? You think Macau is now going to fast track Wynn's Cotai lot while it gets investigated by the SEC and sues its largest shareholder over the next year or two? What about the S&P ratings downgrade from positive to stable that just came out? Do you think it looks favorable to up your liabilities overnight by $2B? Do you think interest payments of over $100M won't affect dividend payments?

    None of these are good things, so don't put lipstick on a pig.

  • Report this Comment On February 21, 2012, at 11:58 PM, cp757 wrote:

    Travis you are persistant. You always talk out of both sides of your mouth. First as you say you do not own any shares you are just an Analyst and then you say : "I may be looking at buying."

    "We don't know exactly what the market's reaction will be over the next few weeks, but I think this is actually a good thing for Wynn Resorts long-term. As I said last week, I like Wynn's value right now, and if shares do drop because of any overhang from lawsuits or an investigation, I may be looking at buying."

    Do you mean you will pretend to buy ten thousand dollars of Wynn if it slips below your last recommendation at 112. How do you do that in your Motley Fool Portfolio ? This battle between Steve Wynn and Okada is a big deal as you said. It will be a long costly trial, and it is uncertain how it will end just as you also said. Okada owns 20% of the shares and has the voting rights on Steve Wynn's and his wife's shares as well. If Okada had redeemed Steve Wynns shares and his wife's shares at a 30% discount what would Steve Wynn have done? Do you think Okada will sit back and just say OK Steve I will take 30% less and oh yes you can make monthly payments for ten years . Travis what rose colored glasses do you look thru? If you add 3.11B in debt plus 1.9B for this note plus 2 B in a long term debt for a new casino in Macau that would be 7.01B in debt. Would that change your calculations and profitability ? Steve Wynn will not get a licence in Japan over this . Okada is in control of that market and Universal will pay what ever it takes to protect their interests in Wynn. Macau will wait on Wynn's aproval until the court case is done and this will drag on for three years and he will open in 2017. You still say : "None of this will impact operations". Your support of Wynn now makes more sense . Travis you have Las Vegas Sands at Cotai Central taking all the market share from Wynn in Macau. Okada spending millions fighting Wynn and Wynn spending millions as well and you say "None of this will impact operations " Las Vegas Sands will have a very easy task adding 10,000 rooms and Billions of dollars in revenue while Wynn sits in court spending 50 million on court fees and all the cost of his long tem debt plus his promise to pay Macau university 135 million with less revenue and less market share . Again a brilliant analysis by Travis on the sector he understands so well. Travis lets just look at what the S&P had to say about Wynn when they lowered the rating "The revision of our rating outlook to stable from positive reflects our view that the $1.9 billion promissory note issued to fund the common share redemption reduces the likelihood that Wynn will have the flexibility to maintain a financial risk profile supportive of a higher rating over the intermediate term. This assessment incorporates our performance expectations and assumptions regarding future development spending and shareholder distributions. In addition, the outlook revision reflects the likelihood of further litigation and potential governance disruption related to this issue, as well as the risk that the valuation of the redeemed shares will be contested, resulting in a potentially higher payout." You see Travis how that works they say the same things I said and you missed the point. The Lawsuit, Debt and Market share have changed and so will the value of the stock.

  • Report this Comment On February 21, 2012, at 11:58 PM, cp757 wrote:


  • Report this Comment On February 22, 2012, at 1:29 AM, cp757 wrote:

    Citigroup analyst says “make no mistake, Sheldon Adelson( LasVegas Sands) is the market in Macau”. Almost all of the 28% of room supply in Macau over the next 13 months will come from Adelson. Sands China’s owner conjured up the dream of a Vegas-like Cotai strip and has almost single-handedly transformed Cotai into the world’s premier gaming mecca. “The centre of gravity in Macau has moved to Cotai,” says Chan. “There are casinos all over Macau, but Cotai is where most of the action is now, and that will be reaffirmed when Cotai Central opens in a few weeks.” Travis thats a few week and Chan gets it. Wynn will not even get to court in a few weeks. Where do you see this income Steve Wynn will bring in. Is Wynn a better stock because they are going to court.Even Cramer stopped pumping Wynn. Travis look at the numbers again.

  • Report this Comment On February 22, 2012, at 9:55 AM, cp757 wrote:

    Travis most of the analysts have come around to the fact LVS has taken over this sector. They will crush the competition in Macau with Cotai Central. Steve Wynn has turned down every new project he has looked at. That is why he will have the problems with revenue going forward . This is what Market Watch had to say about the biggest hedge fund investor in LVS. Las Vegas Sands LVS was JAT Capital's largest position at the end of the fourth quarter. It owned a stake worth $258.71 million, or 6.05 million shares. Thaler increased his fund's stake in the company significantly during the fourth quarter, as it had had just 4.47 million shares, worth about $171.47 million, at the third quarter’s end. Wynn doesn't have the earnings growth Las Vegas Sands does. Wynn's earnings grew by 9.24% per annum on average over the last five years. Analysts estimate its earnings will grow a bit more aggressively going forward, predicting earnings growth of 11.98% per annum on average over the next five years, which is less than half that predicted for Las Vegas Sands and more than a few percentage points under its industry's expectations.

    We like Las Vegas Sands and recommend it as a strong buy. The deciding factor here is Cotai. The Cotai Strip is located in Macau and is positioned to become the Las Vegas of Asia. The company has a strong presence in Las.Vegas, Singapore and Macau. In the case of the latter, it is in the process of building a location on the ultra-exclusive Cotai Strip. Competitor Wynn is not expected to enter the market in Cotai until 2016. This gives Las Vegas Sands a distinct edge.

    Investors buying in now, before the resort is completed, will be in a great position to capitalize on that edge. Stephen Mandel's Lone Pine Capital is also a fan, having initiated a stake of 7.37 million shares or $282.42 million at the end of the third quarter. Columbus Circle Investors , Bain Capital , and D. E. Shaw are among other LVS investors.

  • Report this Comment On February 23, 2012, at 1:31 AM, cp757 wrote:

    During December and January, Sands China Ltd. continued to lead the mass-market segment in Macau with a weighted share of customers of 34.3 percent, according to Union Gaming Research Macau.

    SJM Holdings Ltd. was second (27.2%), followed by Galaxy Entertainment Group Ltd. (20.0%), Wynn Macau Ltd. (7.2%), MGM China Holdings Ltd. (6.4%), and Melco Crown Entertainment Ltd. (4.9%).

    If you combine WYNN, MGM, and MPEL they dont equal Sands Macau.

    Wynn Macau has lost a lot of customers and only has 7.2% and that is a big problem for Wynn. It looks like SJM Holdings Ltd also came in ahead of Wynn and so did Galaxy Entertainment Group Ltd . Travis that means that most of the customers went to Sands Cotai Central giving them 34.3% of all the customers. That is the same thing I was saying . Wynn will lose market share as well as the value in their share price.They did come in ahead of MGM,and MPEL.

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