"Gossip is the art of saying nothing in a way that leaves practically nothing unsaid…" Walter Winchell (1897-1972)
During the mid-80s in Atlantic City, Steve Wynn's Golden Nugget was the undisputed poster child property for an education as to how to make money in the casino business. Just being Steve Wynn was a good start. His properties were known to literally spring from his fertile imagination, more like children than buildings. So it was inconceivable back then, as his property led the town in so many metrics, that the possibility that he would ever sell that cash machine was zero to none. Moreover, he had assured his loving employees at an all-hands on-deck meeting that he was going nowhere when recurring rumors about his leaving AC kept springing up. He promised he would go ahead with his dream property at the Marina, and all was well with the world.
That was until New Jersey gaming authorities irked him, overplaying their hand about compliance issues and the targeting of a few key Wynn employees in investigations of questionable friendships with unsavory individuals. His frustration mounted over that and the town's regulatory excesses, in general. Weeks later, when Ballys, back against the wall defense against a greenmail move, forced their hand to acquire another AC property quick, they eyed Wynn: the Golden Nugget. And then sprung loose a fat $440 million offer for the property.
Wynn, amid the abject shock and awe of the town, took the money and ran.
It was clearly a case of never say never.
Fast forward now to March 2000. Wynn shares had sunk to a low of $10. This was the result of an earnings miss and other noisome questioning of his moves by the analyst community. Meanwhile, Las Vegas legend, financier Kirk Kerkorian was actively buying shares of Wynn's Mirage Resorts and making noise like he was about to make him an offer. Now, Wynn was against the wall. Yet his answer came flying back: over my dead body. The Mirage was the money machine dream Wynn had created with the windfall he'd gotten from the Atlantic City Nugget sale.
But this time, on the record as being fed up with stock market gyrations he thought were utterly foolish, he watched as his stock, and by extension his net worth, getting pounded daily.
Then, as promised, Kerkorian came forth with a $17 a share offer. Wynn quickly refused and vowed to fight on. So Kerkorian raised his bid to $21 that included assuming $2 billion in Mirage debt. That came to $4.4 billion and suddenly, over Wynn's very live body, came the nod and the signature toothpaste ad smile. He sold and promptly bought the old Desert inn, imploded it and promised to build yet another game-changing property we have come to know as The Wynn, which opened in 2005. After that came The Encore, which threw open its doors at the end of 2008 in the teeth of the financial meltdown. Both properties thrived.
Against this history, last week when Twitter chat zinged around the market that Wynn (NASDAQ:WYNN) was getting a $125 a share offer for the company from Las Vegas Sands (NYSE:LVS), the stock jumped 3.3% in one day and did not immediately fall back when the rumors were vigorously denied by the company. A 19% premium was implied in the rumored deal.
Further speculation ran all over the place that Wynn would never accept $125 a share, but he might decide to kick the tires. There was a case to be made for such a deal that made great sense:
1. CEOs Wynn and Adelson were close, working together on the Trump presidential campaign and inaugural ball committee. We know that several years ago, Wynn was a guest on a Mediterranean yacht cruise Adelson had chartered. You can bet the men did not sit there talking about the beauty of the light in southern French waters. There is and always has been a lively competitive spirit between the two men, but they get along well: a mutual admiration society, at least in public. So talk of ego clashes among two men possessed of giant ones was exaggerated according to our sources who have been long-time observers of both companies and both men.
2 Wynn's business model targets the upscale tourist and VIP gambler and Adelson, the mass tourist, convention, meeting and expo business linked to a very respectable foothold in the high end as well. Marketing-wise, it's a good match.
3. Macau GGR is on a strong, eight-month recovery path now, and Las Vegas visitation is up. Trump policies in tax reform, regulatory reform, and infrastructure spending, all play well for the Las Vegas market. Together, Wynn's two properties and Adelson's two properties produce a much better balanced Vegas footprint than they now occupy singly. Moreover, Wynn's $1.5 billion Paradise Park outdoor lagoon casino hotel project, scheduled to open in 2018, could bring at least $300 million in profit annually to the company. Beyond that Wynn is expected to reappear for the first time on the US East Coast in early 2019 with a massive Boston metro casino hotel, also designed to be a game changer in the Northeast gaming scene.
4. Meanwhile, both companies can be expected to be serious bidders for gaming licenses in the potential $30 billion Japanese gaming market. We'll have a better idea toward this fall when the Diet committee charged with the task of selecting the sites, designing the regulations and awarding the licenses, completes its work on the enabling legislation. A combined Wynn/LVS mega property in one of the biggest markets presumptive, Osaka, could run $6.5 billion according to long-time observers familiar with the Japanese gaming scene. Such a project would be easily financed and would attract, if necessary, a powerful Japanese minority partner. LVS has likewise recently been in Vietnam kicking the tires seriously in that country of 89 million.
5. The timing seems right. Wynn is 75, Adelson 83. Both men have yet to clarify management succession issues. Both companies do have good bench strength but until someone is actually tapped, it would appear that they both have every intention - health issues notwithstanding - to remain just where they are. I believe this to be the case. My sense of the matter is that in Wynn's case, the creative development part of his job is the challenge he loves best. I would think he'd want to stick around at least until he completes his two pipeline projects. As for Adelson, his agenda is compelling as well: bidding successfully for licenses in Japan, Vietnam and possibly, even Korea. His recent asset sale of the Bethlehem PA, Sands property for $1.3 billion and his hanging the for sale sign on 49% the MBS Singapore mall, which could fetch another $3.3 billion, leaves long-time LVS watchers thinking whether he will next consider selling a chunk of the Macau Malls, potentially bringing net-net around $7.6 billion to the LVS cash war chest. It could total $12.2 billion in cash if all these deals materialize and close.
A combined company could have a market cap of $54 billion, with a share price in the range of $250 to $275.
So how seriously should the market assess these rumors? Have we reached a stage in the market where Twitter tweets rather than hard facts and logic rule? The answer to that is that since the days men gathered around the Buttonwood tree in 18th century New York where the stock market was born, rumor is part of the currency to money making. Real or fake we have learned that while there is not always fire where there is smoke, there is also known history which tells us that often the past is precedent.
Wynn's history tells us that he is indeed a seller at the right price. Whether this is the right time, the right place and mostly, the right price for either him or Adelson nobody knows. Twitter tweets are wisps of digital air that ignite quickly and fade faster.
Peel away the rumors and what do you have? A standalone Wynn that even at $110 has upside room to ride.
Whether the Twitter tweets turn out to be just more air-headed tomfoolery or later prove to have some basis in fact distorts our vision of the real prize for investors here: That even if it holds around the "what if" trade of $110 a share through the next several weeks, the company's fundamental prospects to reach our target remain solidly based on several tangible realities:
1. Yoy gains in monthly GGR in Macau since last August appear headed for its eighth consecutive month. March was off to a surprisingly strong start. Our call for this month's GGR upside is in the 9% to 12% range depending on late month hold percentages.
2. Wynn Macau revenue for the first two months of 2017 is up 10.6% largely due to the contribution from the new $4.4 billion Wynn Palace at Cotai. We think that property, in a fully recovered Macau, could generate $1 billion in EBITDA by 2018. The company produced $550 million in Macau EBITDA in 2016 - down from its 2013 highs but headed north again. Wynn Las Vegas produced $475 million in EBITDA in 2016, leading in high-end play, powerful non-gaming revenue feeds and ready to get its disproportionate share of the upper spending segments of the 43.2 million projected visitors to the town this year.
3. Assuming the LVS buyout Twitter tweets go the way of thin air as most of them do, we see Wynn producing a five-year average annual earnings growth of between 9% and 11%, with the biggest spike next year when Paradise Park opens. (Current Wynn thinking is to charge a $20 entrance fee to the complex, which alone, by our calculation, could produce $120 million in revenue.)
So what we see here are buyout rumors disguising what is otherwise a powerhouse case for the shares at our $135 target assuming the Twitter talk turns out baseless. That means that, even if the stock holds its Twitter gains or something close to it against round trip profit taking, day traders and options chain shakers, it will continue to head north. Through a lot of understandable headwinds since the hurricane strength headwinds that buffeted Macau in February 2015, we remained strongly bullish on Wynn.
Short money traders, put players, out and out non-believers in the Wynn premium poured forth a fusillade of SA "wrong" comments on our calls predicting the Wynn shares were doomed to slide to the 70s or below. We held our ground, not out of any stubborn pride in our own industry-centric analysis; had we felt the shares were wildly overvalued due to Wynn's considerable debt load and the six months of month-over-month declines in Macau GGR, we would have joined in raising the same big red caution flag.
Our confidence in the company springs from what we know about Steve Wynn, about his track record, the quality of his product and particularly, the ambiance of his properties. These guys know their customers. That's rule one of money-making in the casino business. Easy to say, harder to execute. Believe me, I've been there. Wynn's employee training in the corporate culture of delivering above average luxury hotel service to the customer is the magic sauce here.
So whether the shares fall back to its pre-Twitter trade of around $100 or continue on their path to our target of $135 by after the Q2 earnings release mid-year, here are our takeaways:
1. Could Wynn do one of his U-turns and decide to sell?
Answer: Of course.
2. If he does sell, is LVS a logical buyer?
3. Most important, if he stays the course totally focused on making sure Wynn Palace overcomes its shaky start (it already has gone a distance to do just that), and sees Paradise Park and then Wynn Everett open in 2019, is the stock now capable of reaching our $135 target short term?
Our answer is yes.
It's our mantra but always worth repeating: Bet against Steve Wynn at your own long-term peril.
Author's note: Our own gaming portfolio has been held in a blind trust for my children and grandchildren for over 10 years due to potential conflicts of interest with casino clients.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.