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MPEL For Sale and Thoughts on Galaxy

I got an email from fellow VegasGang'r David McKee this morning re: MPEL and Galaxy and I kinda think my response to him is worth sharing. It's a bit more conversational that the usual conversational tone, as it was written primarily as an email.

Here's his original missive:

I'm waiting with bated breath for that PBL Melco data. I dunno about you but I think Ho Jr. and Packer Jr. would be crackers if they sold -- especially to Harrah's, which probably can't afford PBL Melco, for a variety of reasons. I agree with your assessment that they've eaten everyone else's lunch and it doesn't look like they've peaked yet. Besides, when you're sitting on a gold mine and growth market, why sell out? It makes no sense to me. None. Nada.

Now, Galaxy, that's another story...

With MPEL's theoretical valuation blasting through the stratosphere since the AMA vip deal ramped up, is it even possible for Johnny Checkbook to string together enough zeroes in this economic climate?

Harrah's seems like the obvious choice, given their desire to get into the Macau game. Harrah's current post-public financial state make any acquisition of Melco PBL doubtful, at least in the near term. MPEL was prime target for takeover during the single digit doldrums a few months ago. With Crown Macau commanding +/- 25% of market share in Macau, MPEL is in the drivers seat when it comes to any possible purchase agreement.

MPEL just gets it. They're pwning the game there in so many ways it's hard to come up with the correct words to describe it. To draw a Las Vegas parallel, imagine if Red Rock cost US$400M to build, was nicer and more intimate than the best of the best Strip behemoths AND snagged 25% market share before it's first year of operation drew to a close. If such a scenario happened in Vegas, the fallout would be enormous, to say the least. This somewhat proves that the Macau gaming business, at least in the eyes of a lot of investors and even industry watchers is still a Rumsfeldian 'known-unknown.'

Galaxy - well... they just don't get it. They need to seriously consider replacing upper management with a team that not only understands the Asian gaming market but has Western marketing panache - i.e. the MPEL brain trust. Galaxy has a no-sale clause in some contract with LVS. I haven't researched the details of this, but knowing LVS' penchant for litigation I'm not surprised they'd add a preemptive finger-in-the-asshole clause to protect their own.

StarWorld is a gorgeous property, but when Wynn is literally 50 steps away you're in trouble no matter how you slice it. As for the MegaResort thing, I honestly don't think they're quite sure what they're doing there beyond building their own copy cat of a Vegas "megaresort." I'm not sure if the general public will understand the post-modernist irony - intended or not - in such a deviously ridiculous 'megaresort themed megaresort.'

It's been about a month or so since I contacted Galaxy Entertainment's press relations contact and have yet to receive any response. By comparison, MGM pinged us back within a week and Melco PBL they initiated contact with us. That's not to say that MacauTripping is equivalent to the New York Times or any major news outlet, but we're obviously worth MGM and MPEL's time.

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Comments & Discussion:

Harrah's in no way can afford to by a company the size of MPEL. Their corporate bonds were yielding near 12% recently (disclosure: I picked up some of that paper). This suggest the creditors (the folks like me that are now paying for their recent Levereged Buyout) think the company doesn't have a bright future. I agree to a limited extent, but bankruptcy is not in the cards in my opinion, hence buying the short-term bonds. Their may even be covenenats in some of their leverage that prohibits them from making an acquisition of that size, until their cash flow improves. Their Macau land alone has appreciated in value tremendously in a short period of time and they purchased the land way, way below actual economic value. I'm remember some thinking they paid several billion for the land at one point, lol.

Galaxy in my humble opinion will be taken out of its misery. The company has too valuable of an amount of land and subconcession that, in itself is worth more than the company's enterprise value. Plus they get a soon to be already built massive casino on Cotai. If I had to put a wager on it, I would suggest Genting will one day make a bid for the company. Whether or not they are willing to sell is another issue. Just my thoughts.

Oh yeah, it just hit me. I don't think Harrah's can buy Galaxy, b/c of the clause in their contract with LVS when the concession was initially subdivided that states that they can not partner with any U.S. based casino. I dunno if "partner" includes a merger, or just a management service contract of their casino.

do you have any reference for this?

This recent article mentions the clause agreement (second to last paragraph references the topic):

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I can't find the "actual document", though it might be burried in some of Galaxy's or Las Vegas Sands old SEC filings probably around year 2002.

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This article suggests Justin Leong's (Genting Group) intrest in entering Macau. I would think a purchase of Galaxy or Harrah's land (and hope for the Gov. to change their mind in the future on macau casinos) to be the most likely scenarios. I don't believe he is talked about much in the gaming industry, but he is a really sharp, young guy that I believe will make a large imprint on the industry one day.

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