When the powers that be finally decided several years ago to allow outsiders to develop casino resorts in Macau, we all knew it was going to be a high-stakes poker game. The decision effectively ended the 40-year monopoly enjoyed by local gaming tycoon Stanley Ho, and left companies from Nevada to Australia fighting for a spot at the table. While there are certainly many hands left to be played, Wynn Resorts (NASDAQ:WYNN) has already raked in a big pot -- worth, oh, $900 million or so.
To review, Macau is a tiny dot of land in the South China Sea, located just west of Hong Kong -- a destination for tens of millions of casino-loving Chinese players. With travel out of the mainland (where gambling is outlawed) relaxed in recent years, visitors have poured into the region in droves, often piling up three deep behind Macau's baccarat and blackjack tables. Gaming revenues soared more than 40% last year to cross the $5 billion mark, and the total is expected to rise 22% annually over the next five years.
Given the enormously favorable demographics and unheard-of returns on investment, companies from around the world have anted up for a chance to play in Macau -- despite an onerous 40% tax rate. When foreign competition was finally invited into the market four years ago, more than twenty of the industry's premier players applied for one of three available 20-year operating concessions.
The first went to Stanley Ho's Sociedade de Jugos De Macau (SJM), which then issued a sub-concession (for a reported $250 million) to a joint partnership between MGM Mirage (NYSE:MGM) and Ho's daughter Pansy. The second license was given to Hong-Kong-based Galaxy, which promptly teamed up with Sheldon Adelson's Las Vegas Sands (NYSE:LVS) in a partnership that soon dissolved.
Wynn was awarded the final concession, and until this week, the company has patiently sat on the last ticket into Macau. Initially, Steve Wynn (never one to shy away from bold plans) intended to develop multiple sites in Macau alone. However, in a December interview with the Las Vegas Sun Times, he hinted that taking on a joint development partner like Harrah's (NYSE:HET) might be a more prudent strategy.
In the end, though, Wynn decided to sell an outright sub-concession to PBL, an Australian media group that is working jointly with Hong Kong's Melco International (which, incidentally, is headed by Ho's son, Lawrence). Perhaps the deal was motivated by potential regulatory hurdles surrounding a previous (and now defunct) development contract with SJM, or maybe it was PBL's desire to get in the game now rather than fight for the next concession in April 2009. Regardless, Wynn was in the right place at the right time to reap Monday's $900 million payday.
Clearly, Wall Street had greatly underestimated the value of a potential sale, and Wynn Resorts' market cap shot up by around $780 million (or $7.83 per share) on news of the deal. The question is, just how much shareholder value has this deal unlocked?
Quite a bit, actually. This one transaction will bring in more than four times the $212 million in EBITDA that Wynn has generated since opening its doors last April -- without sacrificing future development rights. In fact, the company is currently eyeing a 54-acre parcel of land on the Cotai Strip (expect to see more news on this front shortly), and the cash inflow will remove some of the pressure associated with lining up financing that would further stretch an already leveraged balance sheet.
From another perspective, $900 million will essentially cover three-fourths of the bill for Wynn's lavish $1.2 billion Macau peninsula resort, which is expected to open later this year. If the company can do there what it has done in Las Vegas, then Monday's rally might just be the beginning of a prolonged winning streak.
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Fool contributor Nathan Slaughter owns none of the companies mentioned.
