Fairly or unfairly, MGM Resorts International has captured the investment community’s attention during the COVID-19 coronavirus pandemic.
The Las Vegas-based company was one of the first casino operators to voluntarily close its nearly two dozen gaming and non-gaming properties, situated across six states, before being ordered to do so by governors and state gaming regulators.
But since the shutdown began with the Empire City Casino in New York on March 14, MGM Resorts has changed CEOs, furloughed 60,000 employees out of its 69,000-person U.S. workforce, seen its stock price fall nearly 70%, and experienced a $10.9 billion loss of market capitalization.
“Given the numerous moving parts within MGM and the considerable structural changes over the past several months, we believe MGM has caused investors the most confusion of any name within the (gaming sector),” Deutsche Bank gaming analyst Carlo Santarelli wrote Friday in a research note.
The analyst said MGM Resorts has enough cash in reserve to weather a lengthy close of its resorts in the U.S., including 13 properties on the Las Vegas Strip. Macquarie Securities estimated MGM is burning through $14.4 million a day during the closures, which translate to the company being able to tread water for approximately nine to 10 months before running out cash.
Nor does Santarelli disagree with investor sentiment toward MGM’s stock price, which closed at $10.58 on Friday on the New York Stock Exchange.
“We expect the domestic casinos to remain closed through May,” Santarelli said, based on whether or not the pandemic curve shows a decline. “We then assume MGM begins a staggered process of bringing assets back online, with Las Vegas Strip assets coming on at a measured pace.”
Acting CEO Bill Hornbuckle, MGM’s president, and longtime top-tier executive, all but confirmed that notion in an interview last week with CNBC. Hornbuckle said MGM will only begin reopening properties “when it is safe.”
With some of the largest, leading resorts in several gaming markets – Beau Rivage in Biloxi, Mississippi, MGM Grand Detroit, MGM National Harbor in Maryland and Borgata in Atlantic City – Hornbuckle said the return of lost business travel will dictate the timeline.
Bill Hornbuckle, president of MGM Resorts International photographed for Premier Magazine on August 15, 2017. (R. Marsh Starks / UNLV Creative Services)
“We won’t necessarily want to be the first to open,” Hornbuckle said. “We’ll open this intelligently and hopefully with some forethought.”
The first concern, for now, is the company’s furloughed workforce. MGM paid two weeks of salary following the closures and is paying healthcare through June 30. In addition, the company put $1 million into an emergency relief fund set up to assist its employees and their families with unexpected hardships.
In a video posted to LinkedIn last week, Hornbuckle said he put $100,000 into the fund, as did other company executives. Meanwhile, headliner Bruno Mars, who has a residency at Park MGM on the Strip, donated $1 million, and the foundation established by the late MGM founder Kirk Kerkorian put $2 million into the emergency relief fund.
Strong balance sheet
Nearly 1,000 commercial and tribal casinos in 43 states have closed since the middle of last month in an effort to slow the spread of the virus. MGM, however, is in better shape than most casino operators as the gaming industry remains closed at least through April.
“We remain of the view that MGM has more than adequate liquidity, with levers to pull to extend the runway if needed,” Santarelli said.
MGM’s balance sheet has approximately $3.9 billion, including approximately $1.5 billion drawn under its revolving credit facility. Much of the money is from the sales/leasebacks of Bellagio and MGM Grand Las Vegas and the outright sale of Circus Circus Las Vegas at the end of last year. The company paid off nearly $3.9 billion in debt following those transactions and doesn’t have any debt obligations due until 2022.
MGM also owns 60.6% of real estate investment trust MGM Growth Properties. Santarelli suggested the company could exercise part of its agreement to receive cash for up to $1.4 billion for partnership units. The company also has a 55.95% stake in MGM China, which oversees two Macau resorts.
“We think the most likely path to the upside in MGM shares, from current levels, stems from a greater appreciation of the ownership interests in MGP or MGM China,” Santarelli said.
Supporting the company
Hornbuckle became acting CEO on March 22 when Jim Murren – who announced in February his intention to retire before the end of next year – departed as CEO and chairman ahead of schedule. Hornbuckle’s new employment agreement included a $300,000 a year pay cut and a $1.1 million in salary in 2020. He will take his pay for the rest of the year in restricted stock, rather than cash, which allows for additional savings for the company.
Meanwhile, board members have been encouraged to purchase outstanding shares of MGM on the open market as a sign of support for the company’s eventual return to business.
Director Keith Meister, through his Corvex Management hedge fund, spent more than $18.6 million to acquire 1.6 million shares of the company’s stock last week at prices ranging from $10.60 to $12.35 per share. Corvex now owns 22.5 million shares of MGM.
Also last week, Chairman Paul Salem spent $5.9 million to acquire 550,000 shares at between $10.60 and $11.73.
Santarelli said it’s “a coin flip” that MGM can generate 70% of its 2019 cash flow by 2021, given that it’s unclear when the gaming industry will be allowed to reopen.
“We don’t disagree with the currently implied negative equity valuation of core (for) MGM, given the present state of affairs domestically,” Santarelli said.
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgaming.com. Follow @howardstutz on Twitter.
