Crown Resorts announced Wynn Resorts has made an A$14.75 takeover proposal for the company. We think a potential deal could make strategic sense, and our hypothetical assumptions suggest reasonable accretion.
Would a potential WYNN-CWN deal make strategic sense?
WYNN has only been a builder and not a buyer of properties in the past. However, WYNN has a relatively new mgmt team (CEO has been in his role for 14 months) and Board, which could suggest a greater willingness to pivot strategies. WYNN’s focus has been on owning a handful of luxury assets in the best gaming markets in the world, and we believe Crown’s portfolio would fit into this strategy (only operating 2 major properties, developing another). WYNN has reportedly been interested in the Australian market in the past. Note Wynn Resorts has not yet commented on the announcement.
Australia is a strong market (gambling spend per head ~US$1,000 vs. ~US$470 in US), with a significant Chinese player base (CWN has historically said less than half of its VIP rev is generated by visitors from Mainland China). WYNN has strong relationships with Chinese players (75% of WYNN’s 2018 revenue was in Macau, mgmt last disclosed 54% of its 2017 Vegas table game rev is from int’l players, of which we believe Chinese are the largest portion). This could create an attractive cross-selling opportunity, one that wasn’t there for WYNN when CWN was partnered with Melco.
CWN has been in turnaround mode the past years following the Crown Detentions on 14 Oct 2016 (see link), CWN has focused on improving risk management, reducing debt and focusing on its upcoming US$1.6B (A$2.2B) Sydney Barangaroo project due for completion 1H21 (CY). The combination of these factors has weighed on business growth and on the multiple near-term.
One potential drawback is Australia’s large geographic separation from Macau, Vegas, and Boston could weigh on mgmt resources for a company that has historically run lean. Another is that Crown is in the middle of a large development pipeline (including apartments) in Australia (capex to peak in FY20 at US$670m), which US investors may not be as comfortable underwriting (especially given potential cannibalization at existing CWN properties and competition in Sydney). However, this provides growth and we expect legacy WYNN’s net FCF to exceed $1B in 2020, which can help fund this development. Regulatory approval could be another potential hurdle, with Australia regulators in the past taking a long time to approve foreign ownership.
Could a WYNN-CWN deal make financial sense?
We have updated our hypothetical merger analysis outlined in our report, How Gaming Stocks Could Benefit from Further Industry Consolidation (2/13/18). We have shown a potential WYNN-CWN deal at A$14.75 (26% premium to CWN’s prior closing price), assuming WYNN can eliminate 75% of CWN's corporate expense (though we show a sensitivity here), and 2.5% revenue synergies for CWN. The deal could be 14% accretive to WYNN on EV/EBITDA, assuming it could maintain its current ~15x NTM multiple, though Australia is not as strong a market as Macau but potentially a stronger market than Las Vegas, which could weigh on the multiple. Assuming a 50/50 stock/cash deal (as proposed), WYNN could also remain close to current leverage (go from ~4x to ~4.6x).
Morgan Stanley | Research