Melco Crown Entertainment sold $200 million worth of primary American depositary shares (ADS) early yesterday morning. The money raised will be used to speed up the payment for its flagship Macau project City of Dreams.
The base deal comprised 38.8 million ADS, each representing three ordinary shares. There was also a 10% greenshoe, which can be exercised during the next 30 days and would bring the total deal size to $220 million.
The shares were priced at $5.15, a 2.3% discount to Wednesday's closing price. The latest prices are a strong recovery from the 52-week-low of $2.33 a share that Melco touched, but they appear to have already peaked -- in late May the shares were trading as high as $6.30.
The deal was said to be multiple times covered by 140 accounts. Investors were a mix of long-only investors and hedge funds. Most of the demand originated in the US, but Asian investors played an important role in driving the early momentum, ensuring that the deal was already looking attractive by the time markets opened in New York.
Melco is one of six companies that have a concession or sub-concession to operate casinos in Macau. Its main properties are Altira Macau (formerly known as Crown Macau) and the City of Dreams, an integrated entertainment resort that includes a casino, bars and restaurants, as well as a 2,200-room hotel. The first phase of this flagship project opened on June 1.
With the proceeds raised by the placement, Melco intends to accelerate repayment on loans used to build the City of Dreams, to fund growth and expansion, with the remainder to be allocated as working capital. At the end of the second quarter, the company had $660 million in cash, compared to debt of around $1.8 billion. On top of this, it has capital expenditure plans of around $175 million for the third quarter.
This is not the first time that Melco has raised capital this year. At the end of April, it raised $165 million ($180 million with the greenshoe) through another ADS sale. The company had approval to raise a total of $400 million but decided not to raise the full amount in one go because investors were concerned about the City of Dreams, which at that time was yet to open. One source said that with City of Dreams up and running, investors were more willing to take a punt on the company. It was also pointed out that since most Macau casino operators currently face capital issues, the notable exception being SJM Holdings, there could be similar deals in the near future.
Last week, the company posted its second-quarter earnings. Headline figures included net revenue of $215.8 million, a 44% decline on the same period last year. The company blamed the drop on two factors: a greater rolling chip volume at Altira and low rolling chip hold percentages at both Altira and the City of Dreams.
It's not all bad news for Melco, however. In July, the company had the largest market share gain for the month, taking up 18% of the pie, behind only Las Vegas Sands with 22% and SJM Holding with 23%. A recent research note by Credit Suisse put this down to a favourable high-roller win percentage at the newly opened City of Dreams.
More generally, Macau's gross gaming revenue in July was up by 2% year-on-year, to $1.2 billion. This is the first time that local gaming revenues have grown since November 2008 but Credit Suisse pointed out that this could be more due to chance than anything else.
"In our view, the recovery was partly driven by favourable luck for the casinos," said the note. The high-roller win-percentage in July 2009 was 2.95%, compared to 2.8% in July 2008 and 2.7% in June 2009. "Adjusting for that, July [gross gaming revenue] was actually flat year-on-year, which in our view is solid proof that sector recovery is on track."
Citi and Deutsche Bank were joint bookrunners on the Melco Crown deal, while CLSA and Oppenheimer were the joint leads.
