Galaxy’s foray into Wynn Resorts puts buyout option on the table

Galaxy Entertainment Group’s USD927.5 million purchase of a 4.9 percent stake in rival casino operator Wynn Resorts is an unprecedented move that, according to Bloomberg analysts, “could shake up the global gambling industry at a pivotal time.”

Wynn Resorts sold 5.3 million newly issued shares of common stock to Galaxy on Thursday last week. The shares were sold at close to the market price of $175 each, for a total of about $927.5 million.

Separately, T.Rowe Price and Capital Research and Management Co., two long- term institutional investors, agreed to purchase the remaining 8 million shares held by founder and former Wynn Resorts CEO Steve Wynn, who quit last month amid allegations of sexual misconduct.

Though there are no immediate signs of a buyout, the sale of new shares to Galaxy, controlled by Hong Kong billionaire Lui Che- Woo, positions the company as a potential suitor should Wynn Resorts go up for sale.

The investment comes at a time when analysts are speculating that Beijing is seeking to reduce foreign interests in the gaming industry in Macau, the only place in China where casino gambling is legal. Some analysts have also noted that if Wynn Resorts were to sell a larger share of the company to a Chinese investor or consortium of investors, the Las Vegas-based operator could earn favor with Beijing.

“The risk of potentially not regaining the Macau gaming concession specifically due to allegations against Steve Wynn are too great not to be immediately dealt with,” said David Bonnet, partner at Delta State Holdings Ltd. “With Galaxy now as a major shareholder, it reduces the potential uncomfortable questions that any gaming regulators, specifically Macau regulators, will have in the upcoming license rebidding.”

Macau-based gaming analyst Grant Govertsen agreed. He told public broadcaster TDM that although the casino landscape would not change in the near term, the purchase positions scandal-hit Wynn more favorably with Chinese regulators ahead of the concession expiry.

“If Galaxy were to acquire [a majority share in] Wynn – and they haven’t done that yet, they’ve just made an investment in Wynn – it would suggest that licensing [for Wynn …] is more likely to happen than not, now that a Chinese company has an ownership stake.”

Looking further ahead, however, Govertsen acknowledged that if Galaxy were to seek a majority share, it would put the casino operator head and shoulders above its competitors in terms of market share.

As Galaxy is already “neck-in-neck” with Sands in terms of market share, Govertsen said, “If they end up acquiring Wynn, they will definitively be the largest market share by a wide margin in Macau, and control so much of the high-end market.”

“Over the longer run, Galaxy may be a potential acquirer of Wynn Macau, and the initial purchase gives Galaxy a first bite at the company,” added a Sanford C. Bernstein & Co. note by Vitaly Umansky.

While Umansky said Galaxy may not want to buy all of Wynn Resorts, “a Galaxy acquisition of Wynn Macau assets would create the leading Macau gaming company.”

Galaxy needs about $8.7 billion to acquire majority control of Wynn Resorts, according to Bloomberg Intelligence. But the acquisition would likely be illegal. According to Macau law 16/2001, shareholders who own at least 5 percent of one concessionaire are not permitted to, directly or indirectly, own 5 percent or more of another casino operator.

The Gaming Inspection and Coordination Bureau said in a statement that it had been informed of the purchase before it was made public and has yet to note any immediate fallout. The bureau added that it would continue to monitor the situation.

Among those who have expressed concern over the deal’s ramifications is lawmaker and gaming scholar Davis Fong, who urged Macau to remember the 2001 gaming liberalization that broke Stanley Ho’s monopoly.

“We don’t want any gaming enterprises teaming up to boost their bargaining power and monopolize the gaming market,” he warned, according to a TDM report. “We can’t forget that our original goal was to break the monopoly and have different operators competing against each other.”

Galaxy’s investment in Wynn follows its expansion plans beyond Macau. It received a casino license with a local partner in the Philippines this month to build a $500 million resort, and is also looking at a potential opportunity to enter the Japanese market now that the country has legalized casino gambling.

The investment in Wynn Resorts will give Galaxy more exposure to Macau’s VIP gaming segment and also put the company on a global stage through its connection to the U.S.-based gaming giant, said Bloomberg Intelligence analyst Margaret Huang.

The fast-moving developments at Wynn Resorts were sparked by Steve Wynn’s departure. However, while the Las Vegas- based company is under investigation by casino regulators in Nevada and Massachusetts, its Macau unit – along with other operators in Macau – is also facing uncertainties as the territory plans to lay out rebidding details of casino concession licenses that will start to expire from 2020.

Wynn Resorts plans to use the proceeds from the Galaxy sale to repay the $800 million loan it took out to settle a longstanding feud with Universal Entertainment Corp., one of its original investors.

Steve Wynn sold his remaining shares for $175 each, or $1.4 billion. The transaction followed the earlier sale of 4.1 million shares, also announced Thursday.

Since stepping down, Steve Wynn has settled a six- year fight with his ex-wife Elaine Wynn, giving her the right to vote and sell her stake in the company, which amounts to approximately 9 percent. The company also settled its battle with Universal, agreeing to consult with that company’s casino in the Philippines. Under new CEO Matt Maddox, several long-serving members of Wynn Resorts’ board have also left the company. DB/Bloomberg