Back on January 12, a rift emerged between Wynn Resorts (WYNN) and the Vice-Chairman of its board, Kazuo Okada. I chronicled this event in "A Red Flag Emerges In Wynn Resorts". It was a truly strange event, with Okada, the representative of 20% of WYNN's equity, challenging the company regarding several deals and wanting access to the books.
On Sunday, February 19, this drama saw new developments. WYNN fought back with allegations of improper conduct by Mr. Okada, and while asking for his resignation, has also decided to redeem the 20% stake Mr. Okada held in WYNN.
First, it must be said that the accusations being made against Mr. Okada seem odd. WYNN is accusing Mr. Okada of, amongst other things, giving gifts to gaming officials in the Philippines Amusement and Gaming Corporation (PAGCOR) over a 3 year period and to the tune of around $110,000. The company arrives at this value by adding up stays and meals at Wynn Resorts properties, using only their official prices. What this seems to show is that Wynn went out and investigated all of Mr. Okada's life to find any little bit of evidence to justify the action that intended right from the start -- removing Mr. Okada from the board and redeeming his shares. That's not to say Mr. Okada was squeaky clean, but it's doubtful that one would find anybody at that level and industry where the worst thing that can be said of them is to have given costly accommodation and meals as gifts to two officials, in a country unrelated to Wynn's geographic presence, over the span of 3 years.
Other news reports say this rift is because Wynn saw Mr. Okada's development of a Philippines casino as constituting competition. More likely, what we're watching here is a fight for the control of Wynn resorts, between Steve Wynn and Mr. Okada.
The terms of the redemption
Also interesting, was the solution found to redeem Mr. Okada's stake. The assumption could be made that 20% of WYNN, which is carrying a $14 billion market capitalization, at the very least that was going to lead to a $2.8 billion payment.
WYNN, however, arrived at a different value. The company engaged an independent financial advisor to assist in the fair value calculation. Out of this independent calculation, emerged a discount was appropriate, due to the fact the shares were subject to terms of an existing stockholder agreement, which supposedly devalues them by restricting their rights. So what value did WYNN's independent financial advisor arrive at? $1.9 billion, in the form of a 10 year promissory note bearing interest at 2% per annum. Grossly put, if we try to determine the present value of such an instrument using 5% as a discount rate, it comes to around $1.46 billion … or about half of the present market value of Mr. Okada's 20% equity stake.
The whole handling of this matter reinforces the notion that there's some kind of large red flag here. Although Wynn Resorts seems a fine company that is trading at a not too demanding valuation, there is clearly something unbeknownst to the common shareholder that simply isn't right and that was strong enough to prompt the forcible removal of a 20% shareholder and board member on terms that seem far from fair on the face of it.