With a string of related-party transactions to its name, perhaps it should not be surprising that Genting Malaysia Bhd (GenM) announced the acquisition of Genting Singapore plc’s underperforming UK casino operation (Genting UK) for £340 million (RM1.67 billion) late last Thursday.
And despite news of the deal circulating in the market before the announcement, GenM’s share price took a hit last Friday, falling the most in 19 months. It touched a low of RM2.46 before closing at RM2.62, down 4.38% from the day before.
Genting Singapore, on the other hand, rose to its highest level in five months last Friday as brokers lauded the sale as positive for the company, with some of them raising their target prices for the stock.
Citigroup had this to say: “Considering that the UK gaming operating business remains very tough, we view this exit as an escape for Genting Singapore and we view it as fortunate in that there was a buyer in the market.” It added that Genting UK will no longer drag down the performance of Resorts World Sentosa.
On this side of the Causeway, the deal was seen as negative for GenM, which will have a gearing of 0.05 times upon completion of the acquisition as a result of the consolidation of the borrowings of the four companies within Genting UK, amounting to £99.2 million as at March 31. For that, it gets the UK casino operation in a challenging and highly regulated market.
The four companies in the Genting UK operation are Nedby Ltd, Palomino Star Ltd, Palomino World Ltd and Genting International Enterprises (Singapore) Ptd Ltd. With 44 casino properties, Genting UK’s operation has the largest number of casino properties in the UK, including five in London. The casinos operate under established gaming brands such as Crockfords, Colony Club, Maxims, Circus, The Palm Beach and Mint.
Although the acquisition, on a price-to-book basis, works out to an attractive 1.2 times given the four companies’ collective net assets of £288.9 million as at March 31, it comes at a high 51 times price-earnings ratio based on a combined net profit of £6.7 million for FY2009 ended Dec 31.
Brokers in reports on July 2 note that the price tag of £340 million values the UK operation at 11.2 times EV/Ebitda, which is higher than the valuation of listed peers. OSK Research says this is 76% higher than the larger Rank Group plc, which currently trades at 6.3 times FY2011 EV/Ebitda. HwangDBS Vickers Reseach says 11.2 times is at the higher end of listed peers’ 9.5 times to 11.5 times.
GenM justifies the buy by saying that it is in line with its strategy to grow its core businesses internationally, complementing its long-term expansion strategy, which includes plans to enter the European and US markets. It had earlier announced that GenM was bidding to develop and operate a video lottery facility at the Aqueduct Racetrack in New York City’s borough of Queens.
GenM adds that it can leverage its large Asian clientele and strong membership database to enhance cross-border marketing efforts. Observers are, however, scratching their heads wondering where the synergy will come from, considering that Genting Singapore had held the UK assets for the last four years.
“If there were synergies, wouldn’t Genting Singapore have realised them in the last four years? After all, both Genting Malaysia and Genting Singapore have a common shareholder in Genting Bhd,” says an analyst who declines to be named.
From Genting Singapore’s point of view, the disposal is seen as positive as it unlocks the value of its UK operation while allowing it to concentrate on Resorts World Sentosa and lighten its balance sheet. In the announcement to the Singapore Exchange, Genting Singapore says it wants to focus on large-scale integrated resorts and stay competitive.
Does this indicate that Genting Singapore is foreseeing a challenging operating environment going forward? While Resorts World Sentosa has first-mover advantage, its competitor Marina Bay Sands officially opened in June. In 1QFY2010, Genting Singapore posted a net loss before tax and minority interests of S$377.9 million. Of this amount, S$476.6 million was attributable to the UK operation and primarily due to impairment losses from intangible assets.
Genting Singapore adds that the proceeds will give it “financial flexibility to maintain its strength and strategically engage new opportunities or enter new markets where appropriate”.
Genting Singapore will incur minimal losses from the sale. According to its announcement to the Singapore Exchange, it will make a gain of S$103.6 million from the sale. However, it will incur foreign exchange translation losses of S$338.8 million, which will leave it with a small loss of S$235.2 million.
Although Genting Singapore sold the UK operation at a loss, brokers covering the company praise the sale. This is likely a reflection of the tough operating environment for casino operators in the UK. Just last week, Australia’s Tatts Group announced that it was writing down the book value of its investment in its British gaming machine business, Talarius, by A$130 million.
The move was made because of an increase in the value-added tax announced in the UK government’s emergency budget, which is expected to affect consumer spending.
The operating environment has been getting more difficult for the gaming sector since 2007 when it was hit by adverse regulatory changes, such as higher gaming duties, a smoking ban and the removal of a certain category of games called Section 21 gaming terminals. The situation was made worse by the global financial crisis in 2008.
However, Genting UK was able to improve its operations and financial results in 2009, Genting Singapore noted it in latest annual report, through a series of measures started in 2008 to reduce costs and improve efficiencies. Then, in April 2009, the tax on poker profits was raised from 15% to 50%, based on the profitability of the casinos. The duty on all categories of amusement machines was also increased.
Given the tough operating environment, it is no wonder analysts covering Genting Singapore are positive about the disposal. Once the deal is completed, it will be interesting to see how GenM will differ from Genting Singapore in the way it deals with the UK operation.
RPTs are not new to GenM. Less than two years ago in November 2008, Resorts World Bhd (now GenM) bought a 10% stake in Walker Digital Gaming LLC from KH Digital Ltd, which is owned by Golden Hope Ltd. Both companies are related to Tan Sri Lim Kok Thay, chairman, director and shareholder of Resorts World. The market punished both GenM and Genting Bhd, sending their share prices down by more than 10%.
More recently in December last year, GenM acquired two companies and their properties from its parent Genting for RM228.64 million.
After the Walker Digital RPT, an institutional dealer noted that GenM’s share price has not traded back to its high levels of RM3 to RM4 per share. With another major RPT, investors could feel “once bitten twice shy” and it remains to be seen if the stock will recover to levels seen in the past.
This article appeared in Corporate page of The Edge Malaysia, Issue 813, July 5-11, 2010