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Is This Proof an MGM-Wynn Resorts Merger Is Off the Table?

By Rich Duprey - May 22, 2018 at 2:45PM

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The casino resort operator is spending $2 billion on itself. That wouldn't leave it much to spend on a buyout.

Although the idea MGM Resorts (MGM -3.10%) might step in to buy troubled Wynn Resorts (WYNN -3.58%) was always more speculative than based on any concrete evidence, the chances of it actually happening have now been reduced to virtually nil.

MGM just announced a $2 billion stock repurchase authorization, and though the program doesn't guarantee the money will be spent on buybacks, it pretty much indicates the casino operator has no intention of buying its rival.

Borgata casino in Atlantic City

MGM Resorts spent $7 billion over the past few years expanding its operations such as buying the Borgata casino in Atlantic City. Now it wants to buy its stock. Image source: Borgata.

Spending a lot on stock

CEO Jim Murren says the amount authorized indicates not only MGM's financial strength, but also the casino's "continued commitment to returning capital to our shareholders."

It also comes after MGM just completed a separate $1 billion share buyback program.

Considering that it repurchased 30 million shares under that authorization, it didn't get much of a deal -- the average share price was around $33 a share, which is a hair above where it trades at currently. By redoubling its buybacks, MGM is signaling that it's more interested in investing in itself than in growth through acquisition, price notwithstanding.

The $2 billion figure also represents more than 10% of MGM Resorts market value -- not an insignificant sum. If it was considering making a move on Wynn, it would certainly want to marshal its resources for the endeavor rather than purchasing stock, or at least, not so much of it.

Sticking to its knitting

Murren has said that after spending $7 billion over the past few years to build out its gaming infrastructure domestically and in China, the casino operator will next focus on upgrading its facilities.

Although opportunities like the newly opening gaming market of Japan might cause management to deviate from that plan -- if the company can win one of the few casino licenses that will be handed out there -- at this point, the priority is sprucing up its existing properties, not building or acquiring more.

Yet after the allegations of misconduct leveled at Steve Wynn forced the resort chairman and CEO out of his positions, the possibility that MGM might step in and buy a property like Wynn's Boston Harbor project -- or even the whole company -- gained credibility. Just because Murren said it was unlikely MGM would make a bid, that didn't mean the casino wouldn't.

Still, such a bid would always have faced high hurdles. Wynn Resorts is valued at over $21 billion -- a hefty price tag for any would-be acquirer. And there are regulatory impediments too, particularly as regards China and the lucrative Macau market, where concession holders are limited in how much of another concession holder they may own. Since both MGM and Wynn hold licenses there -- licenses that are coming up for renewal in the next few years -- a merger might not survive Beijing's scrutiny. And neither company would want to jeopardize the positions they already have in the world's biggest gaming market.

Betting on itself

Shares of MGM Resorts don't appear to be particularly cheap right now. Despite being down 17% from their 52-week high and off 5% year to date, the stock trades at 33 times trailing earnings and almost 18 times analysts' average estimate for the coming year. Wynn and Las Vegas Sands trade at similar forward P/Es.

But those two derive most of their revenue from China, which is a market on the rebound, whereas MGM generates the majority of its profit domestically. While it has also had a presence in Macau for years, it was late to expand into the newer Cotai district, which is where the recovery is centered. Its MGM Cotai resort only opened this year, nearly 18 months after Wynn and Sands opened their own resorts there. 

It may never have been more than conjecture that MGM Resorts might buy its rival, but by saying it values its own stock more highly, the casino operator may be putting the speculation to rest.

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Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
$28.95 (-3.10%) $0.93
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
$57.38 (-3.58%) $-2.13

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