According to the analyst team, the proposal’s assumptions look aggressive, and applying more conservative assumptions to the same framework easily results in a range of values similar to Merrill Lynch’s current $25 price target. The firm does not see MGM moving forward in its current form. As a result, Merrill Lynch maintains a Buy rating for MGM based on an ongoing Vegas recovery and option value, whether it is new growth projects, stabilization or improvement in Macau.
The $25 price target is based on 11 times the firm’s 2016 EBITDA estimate and is in line with the sum of the parts analysis, and it represents a more than 50% discount to MGM’s adjusted all-time high.
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The upside opportunities include a stronger than anticipated recovery in Las Vegas, improving consumer sentiment and its 51% ownership stake in MGM China. The downside risks include balance sheet and liquidity risks proving worse than expected, continued Strip competition and continuing near-term softness in the Macau market.
The key challenge that MGM will have to hurdle is its levered balance sheet. The analysts went on to say:
Our understanding has been that MGM has fairly strict change of control provisions in its bond indentures, where meaningful movement of assets (>15%) could trigger a need to refinance much of MGM’s $14B in debt. By spinning out an OpCo (or C-Corp), L&B believes it can avoid a change in control by leaving the real estate in place. Then, to get MGM’s leverage ratio down, L&B assumes a levered recap of Macau combined with select US asset sales. We think the C-Corp idea is an interesting one and could spark further conversation on real estate alternatives for MGM.
The proposal seems to be a stretch as it is currently, but from another perspective it is not bad to explore all opportunities.
Shares of MGM rose 2.4% to $22.25 in Wednesday’s early trading. The stock has a consensus analyst price target of $26.56 and a 52-week trading range of $17.25 to $27.64.
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