Quick Take On Potential Wynn Resorts And Crown Resorts Merger

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About: Crown Resorts Limited (CWLDY), WYNN, CWLDF
by: Himalayas Research
Summary

Potential deal could value Crown Resorts at A$9.99bn or 26% takeover premium.

Proposed consideration is 50% cash, 50% Wynn shares.

Implies 11x forward EV/EBITDA for Crown Resorts.

Unlikely value accretive, but appears to be a defensive move for Wynn.

Following the announcement that Wynn Resorts (WYNN) is in talks with Crown Resorts (OTCPK:CWLDY), shares of Crown Resorts rose 20% to A$14.05. The proposed deal would imply a value of A$14.75 per share with the exchange ratio being fixed, using a volume weighted average price ('VWAP') for Wynn shares, immediately prior to the announcement of an agreed transaction. At the date of the proposal, the VWAP of Wynn shares implied an exchange ratio of 0.042 Wynn shares per Crown share.

Implied valuation

If the takeover bid is accepted, it would value Crown at about 11x forward EV/EBITDA, up from 9x when it last closed before the announcement.

The enlarged FY2020E EBITDA would include Wynn's US$2.2bn and Crown's A$0.8bn (US$0.57bn). The total FY2020E EBITDA could reach US$2.8bn, compared to Wynn's FY2018 adjusted property EBITDA of US$2.0bn.

Net debt to EBITDA would increase to 3.6x from 2.6x as Wynn absorbs Crown's A$1.1bn debt along with its US$9.4bn.

Wynn would have to issue about 24.5m new shares (if they choose this method). In the end, the new company would be split about 80:20 between Wynn and Crown shareholders.

Is it a good deal?

Probably for Crown shareholders, especially for Packer as it appears he aims to divest his 46% shareholding of Crown and because of Crown's tumultuous exit out of overseas markets due to run-ins with Chinese law enforcers which landed 19 of its executives in prison.

Crown has been essentially having flat to negative EBITDA growth so getting paid 11x EBITDA would appear to be a sweet deal.

For Wynn, I don't think it's particularly enticing. Although on the bright side, Wynn could benefit from diversification into Australia which is untapped by other US casino operators and assist Crown in ramping up its Melbourne and Sydney casinos. The Sydney casino in Barangaroo is a 6-star resort slated to open in the first half of calendar year 2021 and has a gross project cost of A$2.2bn of which A$1.4bn is the net project cost. Given Wynn is a premium resort operator, Crown's properties could benefit from the branding and operational expertise.

Source: Crown Resorts

Conclusion

Not particularly exciting for Wynn shareholders, but rather, it appears to be a defensive move to seek diversification globally and also as a takeover defense for itself as most other operators would not be too interested in the stagnating Australian gaming market. If the deal goes through, management's guidance would be key and we could learn more regarding its long-term strategic objective.

Given this potential deal, it would be better to wait for more clarity before establishing a position.

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.

Additional disclosure: Disclaimer: All research, figures, and interpretation are provided on a best effort basis only and may be subject to error. Any view, opinion, or analysis do not constitute as investment or trading advice, please do your own due diligence.