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GENM (4715) Genting Malaysia Berhad - Acquiring Related Party Asset

Genting Malaysia (GENM) announced that its wholly-owned subsidiary, Genting USA (GenUSA), has proposed to acquire 46% of Empire Resorts (Empire) from parent company, Kien Huat Realty (KH Realty), for USD128.6m (RM538.8m). Concurrently, GENM and KH Realty will establish a joint venture to acquire the remaining shares of Empire. Empire is a gaming and entertainment company that operates a casino resort in New York. However, it is currently a loss-making company and it remains unclear how GENM would be able to reap the potential synergic benefits of this acquisition. This is expected to complete by 4QFY19 and hence, would not have any impact on FY19F. We maintain our earnings forecasts and Neutral recommendation on GENM pending further details on this proposed acquisition. However, we feel that market may view a related party transaction (RPT) negatively and we see risk of share price weakness following this announcement.

    Salient points. GENM has proposed to acquire a 46% stake in Empire from KH Realty, which also represents approximately 35% of the outstanding voting power of Empire on a fully diluted basis after conversion of all preferred stocks at a cash consideration of USD9.74/share (5% premium to closing price) totaling USD128.6m. Concurrently, GENM and KH Realty will form a joint venture (JV) to acquire outstanding shares held by shareholders of Empire unaffiliated with KH Realty at a cash consideration of USD9.74/share. GENM and KH Realty would each make a cash contribution to the JV in an amount sufficient to permit the JV to pay for all amounts payable under the privatization plan. GENM and KH Realty would hold 49% and 51% of the JV respectively.

    Operations of Empire. Empire is listed on the Nasdaq Stock Market and it operates Resorts World Catskills (RWC), a casino resort located in Sullivan County, New York. RWC commenced operations in February 2018 and features a 332 all-suite hotel, 1,600 slot machines and over 150 live table games. It also owns Monticello Casino and Raceway (MCR) which began operations in 1958 in New York. MCR is located near RWC and features an electronic gaming machine and harness horseracing facility.

    Issues with RPT. Although it was stated in the announcement that GENM will benefit from potential merger synergies (market positioning, cost savings, etc) between GenUSA and Empire, details are not readily available to make more conclusive assessments. Funding will not be an issue for GENM as it will be supported by its internally generated funds. On face value however, we are less enthused over the parent company’s tapping of GENM’s cash reserves on non earnings accretive ventures.

Source: PublicInvest Research - 7 Aug 2019

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