Link to part 1 explaining why losses for Empire Resorts should narrow or turn profitable in the future:
Part 2: Purchase of Empire Resorts Inc. Doesn’t Look Like Bailout
1. Kien Huat (the vendor) subscribed for a rights issue at USD14.40 per share in 2016. The exercise led to an injection of USD287m in capital to fund the equity portion to construct Resorts World Catskill (the debt portion was USD545m). Kien Huat subscribed for shares in Empire Resorts Inc at a 48% premium over GENM’s acquisition price of USD9.74. If Kien Huat really wanted to screw investors over, they would have chosen to divest their direct stake to GENM at a price closer to USD14.40 -- Empire Resorts traded at USD14.00 per share as recent as May 2019. The link to the rights issue prospectus is provided below.
2. Kien Huat pumped USD392m over the years to build up its stake to 84%. This values the company at an average valuation of USD466.6m (USD392/0.84), a 39% premium to its current valuation of USD335m based on USD9.74 per share. USD392m was derived from 3 transactions: an initial USD55m capital injection in 2009, a rights issue of RM50m to obtain a gaming license from the state of New York in 2015 and the rights issue in Point 1 of USD287m to fund Resorts World Catskills. By disposing 46% of its 84% stake for USD128.6m, Kien Huat will be making a loss on disposal of USD51.9m (USD180.5m – USD128.6m = USD51.9m) on its equity investments into Empire Resorts Inc, not to mention opportunity costs. Links provided below.
3. Kien Huat will still maintain an effective stake of 75.2% in Empire Resorts Inc. From its initial 84% direct stake, Kien Huat will still maintain a 75.2% effective ownership in Empire Resorts Inc. This is through its 49.5% deemed interest in GENM which will own 49% of Empire Resorts Inc, hence an indirect stake of 24.2%. Adding this up with Kien Huat’s 51% stake will result in an effective stake of 75.2%. This is important as any future losses (or earnings if you are the optimistic type) will still be reflected by Kien Huat’s consolidated accounts, albeit being 9% lower than its initial 84% direct stake. This means that Kien Huat is not entirely shifting its losses (or earnings) to GENM.
4. Kien Huat’s cash proceeds of USD128.5m from GENM unlikely for personal gain. Most of this, if not all, will likely be used to recapitalize or reinvested in Empire Resorts Inc. Bear in mind that Kien Huat maintains a direct 51% stake in Empire Resorts Inc through the joint venture arrangement. According to the Bursa announcement, Kien Huat will contribute its share of any future capital requirements. It is almost a certainty that Empire Resorts Inc will need more capital. However, I do not expect the requirement to be that high, as the construction of Resorts World Catskills has already been completed. Most of the fresh capital would go towards funding working capital, paring debt or for future expansion in Orange County Opportunities. Safe to say, Kien Huat will not be cashing out and walking away into the sunset anytime soon.
5. The price drop in GENM probably isn’t justified. According to the cover story by The Edge Financial Daily, GENM lost RM2.6b in market cap after the acquisition was announced. In my calculation, assuming the worst case scenario where GENM fully writes-down its eventual 49% stake, the hit would be RM694.8m. If I assume the hit to be at full enterprise value (EV), ie adding in its 49% share of net debt amounting RM1.1b, the hit would be RM1.8b to GENM, still not RM2.6b. This assumes that the assets acquired, ie 1,700 acres of land, an integrated casino, hotels, a race track, etc are totally worthless -- zero value – not a single dime is recoverable from asset sales. According to its Bursa announcement, the acquisition would make up a maximum of 4.01% of GENM’s net assets, but the share price fell more than 10%.
6. Conclusion. Kien Huat still owns an effective stake of 75% -- they suffer just as much or more compared to minority shareholders on Empire Resort’s performance. The conclusion that the acquisition is value eroding to GENM is premature, as no projections were made on its 2020 numbers (losses probably peaked in 2018 and the first half of 2019). GGR is growing at an encouraging pace in the second quarter of 2019, and new attractions and gaming facilities are being added -- creating new growth avenues. A better gauge of the impact on GENM’s earnings would lie in Empire Resorts Inc’s third or fourth quarters of 2019. The rationale of consolidating the New York casino businesses makes a lot of business sense, not only in creating synergies but allow management to be more focused, instead of managing multiple listed companies. Kient Huat does not appear to be benefiting from the stake sale at the expense of GENM minorities. They are selling the stake at a discount to its own cost of investments. The proceeds from the stake sale will likely be reinvested back to Empire Resorts Inc.