MGM Macau IPO Still Spells Trouble

As MGM Resorts (NYSE: MGM  ) continues gradually selling off the most valuable parts of its business, the company is starting to look like a shell of its former self. Treasure Island in Las Vegas is now in the hands of billionaire Phil Ruffin. The once-highflying Borgata in Atlantic City was sold in favor of the company's casino in Macau. And now the company is selling a piece of its best asset.

An IPO for the MGM Macau business is being planned that could bring $800 million to MGM's joint venture with Pansy Ho, although no plans for the funds have been released. A likely use is a planned development on the Cotai Strip, which will finally bring MGM to the fast-growing area of Macau. I would like to see MGM find a way to reduce its $12.6 billion debt load, but I was also hoping for cash flow from Macau instead of the company selling off a piece of the business.

The sale will put additional pressure on results on MGM's CityCenter property in Las Vegas, which has struggled since its opening. If the massive resort can start pulling its own weight, MGM may have a chance to begin reducing its debt load but we need to start seeing results soon.

MGM releases earnings on Monday so stay tuned for more information next week.

Do you know what a casino's risks are?
In the U.S. the gambling business is pretty simple. A casino/host develops a relationship with a player/whale, a marker is signed to give the player credit and if the player loses at the tables, the losses are collected. If you're Charles Barkley, collecting payment may require a little legal action, but the concept is pretty simple.

Macau, however, operates with another layer, the junket, which funnels VIP clients to casinos and extends credit -- sometimes millions of dollars -- to players. So the junket owes the casino on behalf of its clients. For their work, the junkets get a little piece of the action.

The big change lately is that junkets have started acting like banks, collecting deposits from wealthy Chinese and posing similar liquidity risks that caused our financial meltdown in 2008. One junket can owe a casino many millions of dollars, a big liability to VIP gaming results should the junket be unable to pay. Wynn Resorts (Nasdaq: WYNN  ) is heavily focused on VIP gaming, and Las Vegas Sands (NYSE: LVS  ) and Melco Crown (Nasdaq: MPEL  ) are big in the VIP game as well.

Casinos don't like to talk about how much they rely on junkets, but in Macau it's big business and the risks are probably bigger than most of us realize. VIP gaming account for some 75% of Macau gaming. I don't think it's a reason to avoid Macau casinos, but it is just a risk investors should be aware of.

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

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Fool contributor Travis Hoium has sold put options on Melco Crown, making him long the stock. 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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