MGM Resorts International (NYSE:MGM) has announced that it raising new debt to refinance itself in order to reduce the interest burden.  Based on the company’s last quarterly release, its net debt (net of cash) stood at almost $13.9 billion. This is huge amount of leverage given close to $5.4 billion of market cap. The company accumulated this debt during the high interest rate environment and refinancing at lower interest rates will increase its ability to repay the debt. This directly reduces the risk and increases shareholder value. As a result, the company’s stock surged by 10% on this announcement. How did the company accumulate this debt burden and what can it do to reduce it?
Looking at MGM’s results, one can see that the company’s revenues have fallen every year between 2007 and 2010. The increase in 2011 was primarily due to the consolidation of MGM China. As far as 2012 is concerned, there hasn’t been much growth except for Macau market. The decline in revenues began during the recession and the growth in the Las Vegas strip hasn’t really picked up much. However, the company needed loans to maintain its hotels and casinos (which weren’t generating enough cash flow) and expand its facilities. The ability to fund these expenses from the cash generated from the business has decreased for the casino company. Its competitors such as Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) have focused more on the growing Macau market. As a result, these companies are generating better cash flows with lower debt burden.
A rebound in the Las Vegas strip is needed to ease the debt burden on MGM. The company’s management stated during its Q3 2012 earnings conference call that September showed an improvement as far as domestic business is concerned and the improvement carried into October as well.  MGM is dependent upon its hotels business to a significant extent and the trends suggest that this business may improve in the upcoming quarters. The convention bookings for 2013 look promising not just from the point of view of number and size, but also the rate.
Furthermore, Macau (China) is one place where every major casino & resorts company is looking to expand. In fact, for Wynn and Las Vegas Sands, Macau is already a much larger business than the U.S. The growth in casino gaming in Macau can be attributed to China’s economic growth and MGM really needs to leverage this opportunity.
Our price estimate for MGM Resorts International stands $10.79, roughly in line with the market price.Notes:
- MGM Resorts International Seeks $5.25 Billion to Refinance, Bloomberg, Dec 7 2012 [↩]
- MGM’s Q3 2012 Earnings Transcript [↩]