Melco/Crown divorce won’t hit ratings, not dilutive

Melco Resorts & Entertainment’s final termination of its links with former joint venture partner Crown Resorts won’t have any impact on the group’s credit ratings and analysts say it won’t be dilutive to shareholders.

Melco on Monday said it would buy all remaining shares, or about 11.2 percent of outstanding stock, from Crown to be funded through a secondary stock sale. Following the transaction, Crown will no longer hold any stake in Melco.

S&P said the “proposed share issuance and concurrent repurchase will not affect MLCO group’s cash flows because it is funded by equity. The transactions will also not affect Melco International Development Ltd.’s shareholding in MLCO, which will remain at 51.2 percent.”

S&P said the transaction eliminates the risk of a potential debt-funded acquisition by parent Hong Kong-listed Melco International. However, it added that Melco International has a limited financial buffer over the next 12 months at its current rating level.

“In our base case, the group’s consolidated debt-to-EBITDA ratio will be 3.8x-4.0x in 2017, close to our downgrade trigger of 4.0x.”

Bernstein Research said the transaction won’t be dilutive to Melco’s shareholders as it is not issuing any new stock. The firm points out that terminating the partnership means that Melco won’t have to work with Crown on any potential new opportunities, including in Japan.

“The transaction eliminates the overhang from Crown’s investment in MLCO. The share sale should be adequately absorbed by the market,” it said.

In a press release Monday, Melco Chairman and CEO Lawrence Ho highlighted the Japan issue as being a consideration in the termination of the partnership.

“This transaction brings to conclusion the world’s most successful global gaming partnership, highlighting our ability to work with partners in both good times and more challenging operating environments,” he said.

“Despite our positive history with Crown, I made the strategic decision to terminate the joint venture arrangement and allow Melco to pursue Japan alone. This highlights our confidence in, and commitment to, identifying and evaluating new markets which will drive long term shareholder value while contributing to the development of tourism and delivering other economic benefits for our host cities where we operate,”