Last week, Kien Huat Realty Ltd — a company owned by Genting group’s late founder Tan Sri Lim Goh Tong’s family — inked an agreement to buy a substantial stake (slightly less than 50%) in Empire Resorts.

Empire Resorts owns and operates the Monticello Casino & Raceway, a 230-acre harness racing track and casino located in Monticello, New York, some 145km from mid-town Manhattan. The company also has a stake in the Concord Hotel & Resort there.

The deal cost the Lim family US$55 million (RM193.9 million). The acquisition is divided into two transactions. On Aug 19, Kien Huat was issued 6.8 million common shares, or a 19.9% stake in Empire Resorts, for US$11 million. In the second part of the transaction, which is subject to shareholder approval, the Nasdaq-listed casino operator will issue an additional 27.7 million shares to Kien Huat for US$44 million. 

Upon completion of the purchase, Kien Huat will own 34.5 million shares for a total of US$55 million cash. Its holdings in Empire Resorts will be one share less than 50% of the voting power.

The acquisition cost of US$55 million for 34.5 million shares translates to US$1.59 per share, a 48.5% discount to Empire Resorts’ closing share price of US$3.09 last Thursday. That seems like a good deal for the Lim family, at least based on the steep discount between the purchase price and market price.

Shareholders of Genting Bhd and Genting Malaysia Bhd (which was then known as Resorts World Bhd) may ask why didn’t Tan Sri Lim Kok Thay, executive chairman of Genting, let the listed entity acquire Empire Resorts? Some may argue that it is unlikely to be a raw deal since the Lim family is keen on it.

But Empire Resorts is currently a loss-making company in dire need of fresh cash to settle debts. In addition to the share purchase, Kien Huat will give a credit facility of US$10 million for working capital and repayment in full for any remaining indebtedness under Empire Resorts’ US$4.4 million senior credit facility with The Park Avenue Bank of New York.

Would shareholders of Genting want a loss-making casino? Probably not, considering the group already has in its stable the UK casinos whose returns have been choppy.

Prior to that, Genting Malaysia bought into Star Cruises Ltd in the late 1990s that had hardly contributed much in terms of profits.
The sum of US$55 million and an additional US$10 million in credit is probably small change for the Lim family, considering it pocketed S$615 million (RM1.48 billion) from the divestment of a 9% stake in Genting Singapore Ltd via an off-market transaction in May.

Also, in November last year, the Lim family sold a 10% stake in Walker Digital Ltd to Genting Malaysia for US$69 million. The two transactions amounted to gross proceeds of RM1.6 billion.

Apparently, buying into Empire Resorts is not the Lim family’s first venture in the US. In 1992, the late Goh Tong helped the Masahantucket Pequot native American tribe to finance the launch of Foxwoods Resort and Casino. Foxwoods is in Connecticut, US.

The Genting founder also financed the setting up of the Seneca Niagara Casino & Hotel in Niagara Falls near Buffalo. Altogether, the Senecan Indians operate three casinos in western New York.

But the current economic downturn has cut into its winnings. Foxwoods, one of the largest casinos in the US in terms of gambling space, may become the largest tribal casino company to default on its debts. The casino group is being hard hit by the recession in the US, in addition to the mushrooming of new casinos that have intensified competition for patrons.

The New York Post reported that The Mashantucket Pequot Tribal Nation, owners of the Foxwoods Resort Casino, is counting on its debtors to agree to a haircut of as much as US$2.3 billion in loans rather than trigger what could be an unusual bankruptcy.

Worse still, tribal casinos cannot have debt-for-equity swaps. The tribes are not allowed to sell assets on the tribal land to pare down debts. Creditors probably can’t take over the assets or operations of casinos on tribal land.

According to the New York Post, the tribe reportedly owes Kien Huat US$21.2 million of the US$160 million it originally borrowed.
The severe downturn in the US proves that the casino business is certainly not recession-proof. But it doesn’t dent the Lim family’s confidence in the prospects of the gaming industry in which it has made its fortune. Kien Huat’s acquisition of a stake in financially troubled casino group Empire Resorts reflects that conviction.

This article appeared in Corporate page of The Edge Malaysia, Issue 770, Aug 31-Sept 6, 2009.