Even if Macau's casino market is slowing, it has proven to be a lucrative business for global operators like Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS), which derive most of their revenue from the enclave, the only place in China where it is legal to gamble.
While MGM Resorts (NYSE:MGM) has a much smaller presence in Macau, generating only 20% of its revenue so far this year and 16% of its adjusted property EBITDA, it gives the world-class resort operator geographic diversity and serves as a buffer to the ups and downs of the Las Vegas market. It also generates some $2 billion in annual revenue.
However, the New York Post reports that activist investor Starboard Value recently established a $500 million stake in MGM with the goal of getting a seat on the board of directors and pushing for big changes: It wants to go all-in on Vegas by divesting its Macau resorts as well as merging its real estate investment trust with the one spun off from Caesars Entertainment (NASDAQ:CZR).
A deck stacked against growth
MGM owns two integrated resorts in China, the MGM Macau and the newly opened MGM Cotai, which is cannibalizing some gaming revenue from the older resort. There could be a few reasons why the hedge fund wants the casino operator out of China.
Macau's growth is slowing. Although gaming revenues this year are 17% higher than at the same point in 2017, the rate of growth is less. That's not necessarily a warning sign -- the region was just coming out of a two-year slump brought on by crackdown on corruption, so comparisons to 2016 would be skewed -- but it suggests Macau's growth may be reaching a plateau.
The Chinese economy is also slowing, and an escalation of a trade war between the U.S. and China would fall hard on Macau. MGM will also be the first of the three U.S. casino operators to have its concession come up for renewal in 2020 (Las Vegas Sands and Wynn Resorts follow two years later), and the nascent market in Japan may siphon off gamblers when it gets up and running.
Las Vegas isn't much better
Shares of the four casino operators have fallen by double-digit rates this year, but that's just as much a result of Las Vegas weakening as Macau's soft numbers. In fact, Macau gaming revenues rallied sharply in August, bounding 17% higher to $26.6 billion patacas, or about $3.3 billion (patacas are the local currency in Macau). Revenue may get dinged because of the massive Typhoon Mangkhut that tore through the region at the same time the Carolinas were getting hit by Hurricane Florence, but October kicks off with a week-long national holiday that tends to cause a spike in revenues.
After badly missing analyst forecasts for revenue and earnings in the second quarter, Wynn Resorts said it was looking for continued softness in the third quarter because of fewer events being scheduled at its Las Vegas properties. Caesars underscored that outlook when it noted that fewer convention events are being scheduled, pointing specifically to the Floyd Mayweather and Conor MacGregor boxing match last year, which was a big draw that won't repeat itself.
There's not a clear-cut trend in favor of Las Vegas over Macau, so Starboard Value's willingness to bet big on the domestic market to the exclusion of others doesn't make sense -- but maybe that's because it's just a rumor. According to recent Bloomberg reporting, sources say Starboard has not taken a stake in MGM Resorts and has no financial interest in the resort operator. The hedge fund itself refused to comment.
MGM China generates $2 billion in annual revenue for MGM Resorts, and despite all of the twists and turns, Macau remains a lucrative, growing market. It would seem to be a foolhardy move to cut MGM off from this revenue stream when Las Vegas hasn't shown any indication that it's about to have a hot hand.