Ten years on, Melco Crown faces uncertain future

Almost a decade on from Melco Crown Entertainment’s 2006 IPO, there are signs that the joint venture between two of the world’s largest casino operators is not meeting its sky-high expectations.

As early as 2004, Melco International Development and Crown Resorts set out a vision for Melco PBL Entertainment, as the joint venture was known before a 2008 name change.

The ambitious project pledged to “develop and operate casino, gaming machines and casino hotel businesses and properties” across a number of Asian territories including Greater China, Singapore, Thailand, Vietnam, Japan, the Philippines, Indonesia and Malaysia.

However, ten years on and Melco Crown has only delivered on projects in two territories: Macau and the Philippines, the latter in partnership with Belle Corporation.

Perhaps more concerning for the JV are signs from both Crown and Melco that they may ultimately be better off going alone.

In May, Crown sold down $800 million in Melco Crown shares, reducing its holding from 34 percent to 27 percent. The move also saw James Packer step down as co-chairman of the joint venture.

At the time, Crown chairman Rob Rankin said the sale was part of “Crown’s ongoing capital management strategy”, while some speculated that Packer was fundraising in preparation of a buyout of some of Crown’s Australian assets.

Yet there was also a sense that Crown was keen to reduce its exposure to Macau despite public proclamations of retaining “great faith” in the territory.

Some even speculated the sell down might be the beginnings of a Crown exit from Melco Crown, although it is unlikely Crown would make a move that dramatic.

“At this point I don’t think we’re seeing the beginnings of a complete exit of Crown from the Melco – Crown partnership,” Grant Govertsen from Union Gaming told AGB.

“While Macau is experiencing a downturn, it does remain the crown jewel of the gaming world. As such, and considering that our long-term outlook for Macau is quite positive, it would behove Crown to continue to participate in this market,” he added.

Meanwhile from Melco’s side, the firm has focused on major projects in Vladivostok and Cyprus through vehicles separate to Melco Crown and is pursuing a license in Barcelona, Spain.  

Ownership issues

Govertsen said that there is a strong logic for a single owner and single decision-making process wherever possible, but Melco Crown’s projects so far have been characterized by additional, third-party involvement beyond the JV.

In Manila, City of Dreams was itself a joint venture between Melco Crown and Belle Corporation so as to fulfil local ownership requirements. Without a change in law, a full Melco Crown buyout would not be a possibility.

What would, however, be possible is a Belle buyout of the property, which officially opened at the start of 2015 and has so far performed below expectations. Indeed, just six months after opening, around 100 staff were suspended as part of cost-cutting measures.

There have been more encouraging signs since. In May, Belle vice chairman Willy Ocier said City of Dreams Manila would post considerable growth now it was finally fully operational.

Govertsen, however, notes that an exit from City of Dreams Manila might not be off the table in the longer run. “Considering that the return on investment story at COD Manila isn’t as had been hoped, I don’t think equity holders of Melco Crown would be disappointed if the company were to explore strategic alternatives for their stake in this property,” he said.

There are similar ownership issues at Melco Crown’s newest Macau holding, Studio City, of which it owns a 60 percent stake. Hedge fund partners Silver Point Capital and Oaktree Capital Management hold a combined 40 percent stake in the resort and, according to Bernstein Research, it would cost in the region of $1 billion to buy them out.

“The company needs to find a way to acquire the remaining 40 percent stake in Studio City,” Govertsen said of the arrangement. “Until that happens we think Studio City will notably underperform the market.”

Despite more than a year of speculation that Melco Crown would complete such a buyout, the firm has yet to find a way to complete a full takeover of Studio City. Melco Crown CEO Lawrence Ho said in February that any such deal would “need to be fair” to shareholders, adding that he was “always happy” to have a conversation with the minority shareholders about a takeover.

Melco didn’t respond to requests seeking comment on this article.

The future

With these issues continuing to linger over Melco Crown, there is some understandable hesitancy about the firm’s longer term prospects.

While the Macau slowdown continues, the firm also faces challenges from a number of new resorts in the territory.

“The immediate challenges for Melco Crown in Macau will be to try and defend their market share, especially at City of Dreams. We think COD will face very intense pressure from Wynn Palace, and then from MGM Cotai,” said Govertsen.

This challenge was reflected in May’s disappointing Q1 2016 results, which saw profits slip 34 percent year-on-year and analysts caution that Studio City’s growth might be the result of cannibalization.

Meanwhile, in terms of potential new Melco Crown developments, Ho admitted in June that, “in Asia and around the world, we don’t see that many opportunities right now.”

Crown itself is looking at a corporate restructuring which would place its Asia holdings in a separate vehicle to its Australian assets – a move seen as a way of insulating those assets and potentially unlocking more value from its investments. Its share price was seen as undervalued due to the problems in Macau.

Crown stock opened more than 14 percent higher in Australia the morning after the transaction was announced.

However, Fitch Ratings injected a note of caution, saying the demerger will result in the removal of material investments that will reduce Crown’s cash flow. Fitch believes that this, combined with the higher dividend, will lead to a weakening in Crown’s credit metrics, particularly as the company has a significant capex pipeline for its Australian casino assets.

While there will be no immediate parting of the joint venture, it appears that both Melco and Crown will proceed with caution until Macau’s fortunes improve or new opportunities emerge in other Asian markets.