MGM Resorts (NYSE:MGM) is under pressure from all sides. Between its building boom that constrained operating profits last year and the slowdown in Las Vegas, MGM's biggest market, the casino operator lost more than 25% of its value in 2018. However, activist investors are starting to see an opportunity.
Bloomberg notes that investors such as Canyon Capital Advisors, HG Vora Capital Management, and Highfields Capital Management have all acquired positions in the company. And more recently, activist hedge fund Starboard Value was reportedly building a stake in the business.
Perhaps to keep activists at bay, boost profitability, and assuage individual investors, MGM threw them some red meat by announcing a new cost-cutting program that would whack approximately 2,000 jobs from its labor force, or about 3% of its 71,000 employees. MGM Resorts has had a spotty record of meeting its quarterly earnings targets, so centralizing its operation in Las Vegas to reduce redundancy and increase efficiency may help MGM meet its objectives.
Where less is more
MGM Resorts' third-quarter earnings report was actually one of its better ones, with revenues rising 7% to $3 billion in what CEO Jim Murren deemed a "challenging" quarter. Because Las Vegas lacked the two big fight cards and some large convention business that helped boost results the prior year, business was lower year over year, but the casino operator as a whole was able to produce higher revenue because of the revenue contributions from its new MGM Cotai resort in Macau, which surged 37% to $606 million.
Still, costs associated with its other new resort -- MGM Springfield in Massachusetts, which opened in August -- lowered domestic resort adjusted property earnings before interest, taxes, depreciation, and amortization, which fell 12% to $627 million for the resort operator. So getting back on track is essential. That means MGM will be swinging its job-cutting ax.
As part of its MGM 2020 plan, the casino operator is looking to deliver some $300 million in cost savings over the next few years, with two-thirds of it coming in 2019. While MGM touted "technology advancements" that will help drive revenue and market share higher and contribute $100 million in adjusted EBITDA improvements, it also admitted that a like amount will have to come from "labor savings."
The Las Vegas Review-Journal estimates that some 2,000 workers may be let go as part of the plan. MGM Resorts has about 71,000 employees, with over 70% of them working in Las Vegas, but the Review-Journal says most of the job losses will come from the ranks of managers and those above them. The market apparently liked what they heard about the plan because shares of the resort operator have risen 15% since it was announced.
A sporting chance
MGM Resorts does have multiple opportunities for growth, with sports betting arguably the headline event. It is just getting its footing in the new sports betting field and may quickly come to dominate it, as the casino operator has agreements with Major League Baseball, the National Basketball Association, and the National Hockey League for aligning their teams with its sportsbook. It also has a separate agreement with GVC Holdings to develop a sports betting and online gaming platform.
Although most of MGM's building program is complete, having spent some $7 billion over the past few years, the company recently entered the New York and Ohio markets and is awaiting a decision on whether Japan will be its next opportunity. These new prospects (particularly Japan, if it wins a license) could elevate revenues and earnings.
Having committed a year ago to boosting operating cash to as high as $3.9 billion by 2020, reducing its workforce may help MGM achieve that goal while holding the activist investors at bay.
Check out the latest MGM Resorts earnings call transcript.