Slot machines at the Mirage Hotel and Casino in Las Vegas.
BRIDGET BENNETT/AFP via Getty Images
Las Vegas is the hottest gambling market in the world.
The deal by MGM Resorts International (ticker MGM) Monday to sell the operations of its Mirage hotel and casino on the Vegas Strip to Hard Rock International for $1.075 billion highlights the lofty prices being paid for Vegas properties at a time when Wall Street is wary about Macau for political reasons.
Macau had been the favorite of investors for years but concerns about Chinese treatment of American casino operators have increased with actions in recent months. China is weighing the re-licensing of Macau properties owned by Las Vegas Sands (LVS) and Wynn Resorts (WYNN).
The Mirage is a second-tier property built in 1989 that likely requires significant investment. MGM got a price of 17 times adjusted 2019 property earnings before interest, taxes, depreciation, and amortization (Ebitda). MGM said it expected to net cash proceeds of $815 million after taxes and fees.
Morgan Stanley analyst Thomas Allen wrote in a client note that MGM got a “higher sale price than expected.” He had assumed a price of $650 million for the property. By his math, the deal is accretive to MGM by about $1 a share. MGM is the largest operator on the Vegas Strip with Bellagio, MGM Grand, Aria and others.
In trading on Tuesday, MGM shares were up $1, or 2.5%, at $41.35.
The sale is complicated because VICI Properties (VICI) owns the Mirage real estate. VICI is reducing MGM’s rent by $90 million annually, more than Allen had expected, and that rent will be paid by Hard Rock.
“Hard Rock will license The Mirage brand for three years as it decides how to reposition the 80 acre site,” Morgan Stanley’s Allen wrote. “Hard Rock has stated its desire to build a Guitar-shaped resort on the site.”
VICI said it stood ready to provide $1.5 billion in financing for the redevelopment of the property.
Allen noted that the sale by Las Vegas Sands (LVS) of the Venetian and other Vegas assets earlier this year was done for around 9.5 times Ebitda , which is the valuation that he had assumed for the Mirage.
At a time when investors are concerned about Macau, they want exposure to Vegas, where there is no political risk and where business has been strong as Americans are eager to vacation again and spend.
MGM stock is up 30% this year, while Las Vegas Sands, which has considerable exposure to Macau, is down 38% to $36.72, with the shares off 21 cents in Tuesday’s session.
Morgan Stanley’s Allen has an Equal Weight rating and a $51 price target on MGM shares.
Jefferies analyst David Katz wrote: “The transaction supports Strip asset valuations. CZR ( Caesars Entertainment
) has also publicly indicated plans to divest one Strip asset in 2022 which should see strong demand. We expect there could be further redevelopment activities around the older, midmarket properties across the Strip, some owned by MGM and other disparate owners.”
Katz has a Buy rating and $57 price target on MGM’s stock.
Write to Andrew Bary at [email protected]
