Sands China raises $2.5 billion after pricing IPO at bottom

Sands China, the Macau casino business owned by Las Vegas Sands (LVS), has priced its initial public offering at the bottom of the price range for a total deal size of HK$19.41 billion ($2.5 billion). The pricing came on the back of a week during which rival casino operator Wynn Macau, which listed in Hong Kong in early October, traded steadily lower, but despite that, sources said the Sands China order book built well and was covered by the middle of last week. It was by no means a blowout though; when it closed on Friday, the deal was subscribed twice over and had attracted a couple of hundred institutional investors.

While some large accounts were willing to pay a bit more, there was a lot of price sensitivity at the bottom of the price range, however, and since most of those investors didn't want to budge, there wasn't much choice but to go with the low end pricing. Still, even at the low end, Sands China fetched a premium of about 6% versus Wynn Macau, which analysts say is warranted given Sands China's greater growth potential.

Specifically, investors are focusing on the future potential for sites five and six, which are located on the Cotai strip across the road from the Venetian, Sands China's current flagship development in Macau. Construction on these sites was halted last year as the parent company was running out of cash, but will be re-started later this year or early next year with the help of money raised from the IPO and a separate $1.7 billion project finance facility currently in the works.

Sites five and six will be opening in 2012 and 2013 and will comprise about 6,000 hotel rooms, approximately 1.2 million square foot of retail, entertainment and dining facilities, as well as 300,000 sqf of gaming space, which is large enough to fit 670 tables and 2,200 slot machines. Sands China also owns three other sites near the Venetian which can be developed in the future, although no details are available at this stage.

By comparison, Wynn Macau will open its second gaming property -- the Encore -- in Macau in the first half of 2010. This means there is less execution risk attached to this company, but also less growth potential -- essentially, what you see is what you get. The Encore is also a lot smaller than Sands China's sites five and six, with 37 VIP tables, 400 luxury hotel suites and a new sky casino. Wynn Macau is also awaiting approval on an application to the Macau government for the right to lease a 52-acre site on the Cotai strip to be used for future expansion.

The greater growth expectations for Sands China, which holds one of six casino licences in Macau, also relate to the fact that it is focused on the mass market, while Wynn Macau is targeting primarily high-rollers and VIPs. Sands China, which is owned by Las Vegas gaming magnate Sheldon Adelson, already controls about 30% of the mass market. According to syndicate analysts, the company is in a prime position to capitalise on any growth in retail spending by Chinese visitors to Macau as it operates about 74% of all grade-A retail space available in the former Portuguese colony.

"If you believe in the future growth of Asia and Asian consumption, you pretty much have to believe in the growth of Macau," said one banker.

The company offered 1.87 billion shares at a price between HK$10.38 and HK$13.88 apiece. As noted earlier, the final price was fixed at HK$10.38. There is a 10% greenshoe that could increase the total deal size to as much as $2.7 billion.

Just over two-thirds of the shares, or 1.27 billion, were new, while the remaining 600 million were secondary shares sold by the parent company. LVS needs capital for its Las Vegas operations, as well as for its ongoing Marina Bay Sands casino and resorts project in Singapore, which is scheduled to open in the first quarter next year.

Ten percent of the deal was earmarked for Hong Kong retail investors and while this tranche was fully subscribed, the order amount wasn't enough to trigger a clawback. Also, thanks to the weak trading of Wynn last week -- and of the Hong Kong market as a whole -- Sands China didn't see the participation of the momentum-driven hedge funds that typically come in towards the end of  "hot" deals and help drive up the price as well as the size of the order book. However, the source noted that the deal was allocated into what was perceived as "solid" hands, including more US investors than are normally seen in Hong Kong IPOs.

The price range values Sands China at 13.5 times its 2010 enterprise value-to-Ebitda, based on the bookrunner consensus, which compares with 12.7 times for Wynn Macau. The latter priced its $1.63 billion IPO at an EV/Ebitda multiple of 14.5 times, but since it started trading on October 9 it has fallen 6.8% to HK$9.39 from its HK$10.08 IPO price.

Aside from the project under development at the Cotai Strip, Sands China owns and operates The Venetian Macao Resort-Hotel, the Plaza, the Sands Macao and the Four Seasons Hotel. The company is known for its more diversified revenue strategy that, alongside the gambling, also puts a lot of weight on conventions, entertainment and hospitality. One analyst report dubs the company as a pioneer in developing the integrated resorts business model.

The stock is scheduled to start trading in Hong Kong on November 30. Citi and Goldman Sachs were joint global coordinators and bookrunners together with Barclays Capital, BNP Paribas and UBS.