Melco Crown taps market for $75 million

Melco Crown Entertainment, an owner and operator of casinos and other entertainment venues in Macau, last night raised $75 million from a follow-on sale of 18.75 million new American depositary shares that was upsized by 25% due to strong demand both from Asia and the US, according to a company statement.

The Nasdaq-listed company also sold an additional 67.5 million ordinary shares to a special purpose vehicle jointly owned by its two largest shareholders -- Hong Kong-listed Melco International Development and James Packer's Australian casino business Crown Limited -- allowing it to raise a combined $165 million, or $180 million if the overallotment option attracted to the public placement is exercised in full.

The deal was arranged by Deutsche Bank and increased from 15 million ADS (each representing three ordinary shares) and 56.25 million ordinary shares. The overallotment option, which has yet to be exercised, remained unchanged at 3.75 million ADS.

The ADSs were offered to investors at a fixed price of $4, which represented a 9.1% discount to Monday's closing price. The company's share price came under pressure following the sale, perhaps because the decision to upsize, which meant the deal will result in 9.4% dilution for common equity holders. The shares spent a large part of last night's session trading around the $4 offer price, occasionally dipping below, but recovered towards the end of the session to finish 6.1% down at $4.13.

Lawrence Ho, co-chairman and CEO of Melco Crown as well as a substantial owner of Hong Kong-listed Melco, notes in a written statement that the fundraising is the right thing to do in the current market environment as it will strengthen the company's liquidity position and ensure a better long-term capital structure.

"We believe these efforts demonstrate the prudent management of our balance sheet, as well as a far-sighted approach to engineering a long-term capital structure for our company that can withstand the inevitable volatility in the global economy -- a cornerstone of our financial philosophy. This is the correct course of action for us, given the uncertainties that remain within global financial markets," Ho says.

In the share sale announcement, Melco Crown also noted that its next big casino and entertainment project -- the City of Dreams on Macau's Cotai strip -- remains on track to open in early June and the projected budget remains unchanged with approximately $244 million of capital expenditure and pre-opening expenses left to spend before the opening in early June.

As a result of the follow-on, the company's cash balance will increase to $915 million from $755 million at the end of March.  

The Macau gaming sector has been plagued in the past six months by a decline in visitor arrivals and falling gaming revenues, which has led to a delay in the construction of several ongoing projects. The fact that Melco Crown has enough cash to proceed with its expansion should therefore be positive.

Melco Crown holds a gaming sub-concession through a subsidiary, and aside from its Altira Macau casino that opened in 2007 and the soon-to-be-completed City of Dreams, the company also operates the Mocha Clubs, featuring 1,300 gaming machines in eight locations. The Company has entered into an agreement, subject to certain conditions, to acquire a third development site on the Macau Peninsula.

The deal is the first by an Asian issuer listed in the US since Chinese online gaming operator Changyou.com raised $120 million from an initial public offering in early April. While quite small, the IPO attracted 15 times as much demand as needed and bankers have been projecting that this would entice a number of other US-listed Asian issuers and to come to market and tap into that pool of demand through follow-ons.