Melco shares jump as it plans US listing for Studio City unit

Some analysts said the IPO proposal doesn’t ‘make much sense’ and speculated Melco might want to gauge valuation and investor interest

PUBLISHED : Monday, 14 August, 2017, 10:40pm
UPDATED : Tuesday, 15 August, 2017, 11:00pm

Melco International Development shares surged up to 4 per cent in Hong Kong on Tuesday, after the company announced plans to spin off its Macau entertainment resort, Studio City, and list it in the US.

However, some analysts said the IPO proposal doesn’t seem to “make much sense” and speculated that the company might just want to use the flotation to “fly a kite” to gauge valuation and investor interest in the joint venture before acquiring the entire entity in the end.

Melco International traded as high as HK$18.94, before paring gains to HK$18.62 by noon, still up 2 per cent.

The company said on Monday night that it has proposed a spin-off and separate listing of its Studio City unit.

Studio City also applied confidentially on Monday to the US Securities and Exchange Commission for a possible initial public offering of American depositary shares (ADSs), the filing said.

The debut listing is expected to commence “as market conditions permit”, and is subject to approval from the SEC. The number and value of Studio City ADSs to be offered and sold are yet to be determined.

New Cotai likely does not want to put new capital into the property. Melco may be willing to dilute New Cotai, but at what valuation?
Sanford Bernstein analysts’ note

Studio City is 60 per cent owned by Nasdaq-listed Melco Resorts & Entertainment, while the rest is controlled by private company New Cotai Holdings, an arm of US funds Silver Point Capital and Oaktree Capital Management.

Melco Resorts & Entertainment is 51.2 per cent owned by Hong Kong-listed Melco International Development.

Melco International Development will remain Studio City’s majority shareholder after the IPO, though its interest in the resort operator will be reduced, according to its exchange filing.

Vitaly Umansky and Zhen Gong from Sanford Bernstein said there are two possible reasons behind the IPO proposal.

The first may be that New Cotai is looking to sell its stake and wants a price validation.

“If a valuation is palatable, New Cotai may be willing to sell secondary shares in the IPO. Alternatively, Melco may be willing to pay a similar price to acquire New Cotai’s interest,” Umansky and Gong wrote in a note.

The other reason could be that Melco and New Cotai are under pressure to begin work on phase two of the Studio City resort.

“New Cotai likely does not want to put new capital into the property. Melco may be willing to dilute New Cotai, but at what valuation? ” the analysts said. “An IPO process may be a way to set a valuation.”

It appeared to the analysts that the IPO plan itself “does not make much sense” based on current information, as it creates additional complexity for Melco, a company which is already complicated, by Macau standards.

“At this stage, we do not foresee Studio City receiving an adequate valuation based on the property’s current performance and structure,” they said.

If the IPO were to happen, the pricing would be at a “substantial discount” to Melco’s valuation.

A more sensible guess may be that Melco is trying to gauge valuation and interest, and the best option in the end would be for them to own the whole entity, the analysts said.

In November last year, Moody’s Investors Services issued a report saying the ratings outlook for Studio City remained negative, as they expected the company’s credit metrics to stay weak over the next 12 to 18 months.

Nevertheless, Moody’s said the outlook could improve if Melco provided financial support to Studio City and if gaming demand in Macau were to stabilise.

Studio City, together with its subsidiaries, operates the Studio City property, a US$3.2 billion Hollywood-inspired entertainment, retail and gaming resort in Cotai, Macau.

It opened in October 2015, underlining Macau’s bid to reinvent itself as a mass-market, family-orientated entertainment destination.