Is The Market Being Too Optimistic About MGM’s Sale Of MGM Grand And Mandalay Bay?

by Trefis Team
MGM Resorts International
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After closing the sale of Bellagio and Circus Circus last year, MGM Resorts (NYSE: MGM) announced its plans to monetize MGM Grand Las Vegas and Mandalay Bay last week.  The shares of MGM Resorts surged nearly 5% after these plans were announced, as the move reinforces MGM’s strategy to focus on an integrated resort in Japan. Per Trefis estimates, MGM Resorts’ Valuation stands at $32 per share which is roughly 10% below the current market price. We believe that the market is overreacting to MGM’s recent property sales announcement, as it remains heavily dependent on the slow-growing region of Las Vegas and also because it is yet to receive regulatory approvals for a proposed integrated resort in Japan.

A Quick Look at MGM Resorts Revenues

We expect MGM Resorts to report $13 billion in Net Revenues for full-year 2019. This includes five divisions:

  • Casino: $6.4 billion estimated in FY2019 (49% of Net Revenues). It includes income from regulated gambling activities at the company’s properties. MGM China, Regional Operations and Las Vegas properties contribute 39%, 36% and 25% of the casino revenues, respectively.
  • Rooms: $2.4 billion estimated in FY2019 (18% of Net Revenues). It includes income from visitors/tourists who lodge in the company’s properties. Las Vegas and Regional properties contribute 80% and 14% of the room revenues, respectively.
  • Food and Beverage: $2.2 billion estimated in FY2019 (16% of Net Revenues). It includes income from food and beverage sales at the company’s properties.
  • Entertainment and Retail: $1.4 billion estimated in FY2019 (10% of Net Revenues). It includes income from retail stores and live performances at the company’s properties.
  • Corporate and Other: $0.8 billion estimated in FY2019 (6% of Net Revenues). It includes income from unconsolidated affiliates such as CityCenter Holdings.

MGM has unlocked $8 billion of capital from the recent transactions

  • MGM Resorts received $4.2 billion and $663 million in cash from the sale of Bellagio and Circus Circus, respectively.
  • The company will now receive another $2.4 billion from the sale of MGM Grand Las Vegas.
  • Sale of Mandalay Bay could further add $2 billion to MGM’s cash pile, using an EBITDA multiple of 8 for the property (which is a more conservative estimate taking into account the 8.6 EBITDA multiple for the Bellagio sale)
  • Hence, the recent transactions have unlocked approximately $8 billion of capital for MGM.

But the lease-back arrangement does not take away MGM’s long-term liabilities

  • For Bellagio and MGM Grand, the company has entered into a long-term lease agreement with the Blackstone REIT and a joint venture between Blackstone REIT and MGP, respectively.
  • MGM has an initial annual rent liability of $245 million for Bellagio and $292 million for MGM Grand and Mandalay Bay
  • That said, the initial annual rent for the three deals is nearly 50% of the property’s annual EBITDA, respectively. (Bellagio’s EBITDA is $490 million and Annual Rent is $245 million)
  • Though the transactions have unlocked $8 billion of capital for MGM Resorts, its exposure to the slow-growing region of Las Vegas remains.
  • Thus, Trefis maintains MGM Resorts’ Valuation at $32 per share, using a forward P/E multiple of 28.5 and a 2020 EPS of $1.13

See all Trefis Price Estimates and Download Trefis Data here

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