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.
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