Packer jumps ship on Melco

Financial services company Wells Fargo considers that Melco Crown Entertainment Limited’s (MCE) unaudited financial results for the first quarter of 2016 are ‘below expectations’. Although net revenue for the period amounted to US$1.10 billion – representing an increase of around 5 per cent from US$1.05 billion for the same period in 2015 – analysts reported MCE’s EBITDA of US$220 million was 7 per cent lower than estimated. This comes after MCE – the company which operates City of Dreams in Macau and Manila, as well as its Studio City property – published a first quarter earnings report which registered a 53.5 per cent drop from US$87.11 million to US$40.50 million year-on-year. However, in a conference call, Melco International Development Limited (Melco) CEO Lawrence Ho stated that while the beginning of the year hadn’t been “great”, he believed that the mass market was stabilizing and that the May 1 holiday had created a positive year-on-year growth. “We remain resolute in our belief that Macau remains the most important and exciting gaming destination in Asia. With ongoing improvements in infrastructure, including the Hong Kong–Zhuhai–Macau Bridge, the Taipa Ferry Terminal and the Macau light rail system, together with the rapid expansion of Hengqin Island, Macau is uniquely positioned to cater to the burgeoning and increasingly consumer-focused, middle-to-upper-class in China and around the region,” Ho stated in a press release. Altira junket debt Wells Fargo considered MCE’s management tone ‘cautiously upbeat’, while investors expressed concern over the group’s ‘abnormal’ US$18 million bad debt reserve. This amount was justified by Melco Crown Chief Operating Officer Ted Chan, during the conference call, as attributable to a single junket operating in Altira since 2008. MCE’s report showed that Altira Macau generated negative adjusted EBITDA of US$14 million in the first quarter of 2016, justifying it as a result of lower rolling chip revenues – US$4.6 billion in the first quarter of 2016 versus US$7.4 billion in the first quarter of 2015 – and a higher provision for doubtful debt. “Adjusting for this incremental provision, our Macau property EBITDA would have expanded approximately 8 per cent when compared to the fourth quarter of 2015. Similarly, Macau property EBITDA margins would have expanded almost 1 per cent when compared to the fourth quarter of 2015, highlighting the strength of our mass market operations and our strong cost control focus,” Lawrence Ho stated in the conference call. The net revenue increase was mainly attributed to an increase in net revenue from Studio City and City of Dreams Manila – with a generated adjusted EBITDA of US$22.1 million and US$28.6 million, respectively, although affected by lower rolling chip revenues and mass market table gaming. Packer jumps ship Melco Crown Entertainment Ltd’s first quarter report was announced after Crown Asia Investment Pty. Ltd., a wholly-owned subsidiary of Crown Resorts Ltd. (Crown), the gaming company of Australia’s third richest man James Packer, sold a US$800 million stake back to MCE, which reacquired 155 million shares for US$5.17 per share, and cutting its stake in the company to 27 per cent from 34 per cent. Packer will also resign as the co-chairman of Melco Crown to become the company’s deputy chairman, while Lawrence Ho will remain CEO and sole chairman of Melco. ‘The repurchase forms part of Crown’s ongoing capital management strategy and proceeds will be initially used to reduce Crown’s net debt position,’ stated Crown in a press release. Crown maintains a US$2.08 billion shareholding in MCE and will be entitled to have two representatives on the board of the company, while in the event that Crown’s shareholding in MCE increases such that it is equal to or greater than, or not more than 1 per cent below, that of MCE, Crown will be entitled to have three representatives on the MCE board again. This step back by Crown comes after Packer announced in 2015 to have “great faith” in the Macau market, following the opening of the US$3.2 billion Studio City casino in October last year. However, analysts claim Packer was holding talks with private-equity firms and pension funds about a possible buyout of some Crown assets, and attributed Crown’s shares value decrease to investment in MCE and decreasing Macau VIP market revenue, Business Daily reported at the time. ‘Crown will assess its capacity to make a distribution to shareholders and, at the same time, maintain a strong balance sheet and credit profile to fund existing Australian development projects,’ Packer’s company announced this week. When asked if the share repurchase agreement was just a first in Crown Resorts selling down its stake in Melco Entertainment stake, Ho stated the deal provided “perfect timing” for the two groups as MCE was also looking at his own “capital allocation strategy”. “I think the opportunity came together quickly and it was mutual, it was by negotiation. So I don’t anticipate any changes in terms of our attitude towards the business and I wouldn’t read anything into this [potentially] leading to other transactions,” Ho stated in the conference call.