Did Melco Just Screw its Filipino Investors in the WORST Way?

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In contrary, looking closer revealed that it has a little bit of generosity left

Taking and Talking Private

Early September, the board of directors of Melco Resorts and Entertainment Philippines or MRP decided that it had to take their company away from Filipino investors and the public market and make it private  so as “to facilitate the Corporation’s future expansion and other business plans by increasing the shareholdings of MCO Investments…”

MCO Investments, to begin with, already owned 72.77% of MRP, and now is seeking to buy the remaining at a suggested stock price by a consulting firm.

The Philippines stock exchange requires an ownership of 95% for a delisting to proceed.

Melco

MRP owns Melco Resorts Leisure Corporation, which is one of the co-licensees (together with SM Investments, Belle Corporation, and Premium Leisure Investments Corporation) that developed City of Dreams Manila.

Basically, the land that the City of Dreams Manila is sitting on is leased by the Social Security Systems to Belle, and Belle to Melco Resorts.

Market performance

Ever since its backdoor listing in 2013, MRP’s share price has stumbled. From 14 Php/share and now down to 7.15 Php/share at the time of writing.

What’s more interesting is after MRP’s City of Dreams Manila opening in December 2014, its share price slumped from somewhere at 15 Php/share to a bottom of 2 Php/share the following year—a whopping 87% loss.

Valuation by FTI (DELISTING PRICE)

FTI Consulting, the third party who calculated the 7.25 Php/share buy out price, used both a MARKET and INCOME approach to arrive at the 7.25 Php/share. The consulting firm also used trailing 12 month and financial forecast by MRP for its valuations.

For the MARKET approach, FTI used forward enterprise value to EBITDA multiples of comparable companies that had given a value of between 6.75 and 7.49 Php/share

INCOME approach, meanwhile, used a discounted cash flow analysis having involved MRP’s forecast of its free cash flow to equity resulting in a value of 6.11 and 6.76 Php/share.

The consulting firm used MRP’s June 30 closing price of 5.20 Php/share as a point of comparison indented of with a 7.25 Php/share fair value representing a 39.4% upside. According to its filings, the 7.25 Php/share also presented a 14% premium over a three-month period.

This tender offer would amount to somewhere near 11.19 billion Php (7.25 Php times 1.54 billion shares) if all Filipino shareholders accept MRP’s offer.

Upset Investors

The 7.25 Php/share certainly did not please early investors in MRP. MRP did a backdoor listing in the PSE in 2013 via Manchester International Holdings Unlimited with a 14 Php/share price.

At 7.25 Php/share, early investors face a near 50% realized loss for a simple buy-and-hold approach.

Put-Up or Shut-Up

It does sound like that regardless of how investors look at it, MRP is dissatisfied with its stock performance and probably is just seeking the doors out of the Philippine stock market.

Rubbing some salt into wound, MRP said in a recent statement that it has “no requirement or undertaking by MRP to any of its shareholders that it will remain a PSE listed company.”

Valuation

In its first half of 2018, MRP reported a 6.4 billion Php increase in its revenue and an impressive 3.3 billion Php increase in profits compared to its year-earlier period.

The City of Dreams operator initially looked like it was swimming in debt with 15.1 billion Php with a book value of 7.27 Billion Php as of June 2018 has indicated a leverage (debt-equity) ratio of 2.1x.

Nonetheless, it had 10.4 billion Php in cash.

With Bloomberry trading its book value at 4x and Travellers (Resorts World) at 1.5x, MRP should be somewhere in the middle and having a value of just 3.50 Php/share.

MRP could probably have just offered a little less lower if it decided to totally screw its investors.

Therefore, the 7.25 Php/share value that FTI provided an ample amount of room from this blog’s more conservative estimate.

It is unfortunate to lose a publicly listed company but it does seem like Melco can slam* the door on its Filipino investors face anytime it wants to just because it can do so.

Disclosure: No shares in any of the companies mentioned.

*Melco can spit on its Filipino investors face anytime it wants to because it can do so

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