Genting shares crash on New York acquisition

On the rationale for this move, the firm says it will better position the Resorts World brand in the northeastern US gaming market


GENTING Malaysia Bhd (GENM) shares plunged as investors fear the deal to buy loss-making Empire Resorts Inc from chairman and CEO Tan Sri Lim Kok Thay’s (picture) Kien Huat Realty III Ltd (KH Realty) will hurt earnings.

GENM fell 43 sen or 11.9% to RM3.18 yesterday in active trade and saw it lose RM2.5 billion in market value, while parent Genting Bhd’s shares fell 47 sen or 7% to RM6.18, losing some RM1.8 billion in value.

The fall in the two stock prices dragged the benchmark FTSE Bursa Malaysia KLCI to close seven points or 0.44% lower at 1604.7 at close yesterday.

On Tuesday, the leisure and hospitality operator inked a binding term sheet with KH Realty for its wholly owned subsidiary Genting (USA) Ltd to acquire 13.2 million shares or 46% of Empire Resorts from the parent company, KH Realty, for US$128.6 million (RM538.8 million), which GENM said will be funded by internal funds.

The 13.2 million shares represent 46% of common stock held by KH Realty and 35% of the outstanding voting power of Empire Resorts on a fully diluted basis after conversion of all preferred stock currently outstanding into common stock.

KH Realty is currently the largest shareholder of Empire Resorts, a gaming and entertainment company, owning 28.91 million shares or 84% of common stock.

The main operations of Empire Resorts include Resorts World Catskills (RWC) — a 1,700-acre (687.97ha) site in Sullivan County, New York — which commenced operations on Feb 8, 2018, and features a 332 all-suite hotel, 1600 slot machines and over 150 live table games.

Empire Resorts which is listed on the Nasdaq also operates Monticello Casino and Raceway, which features electronic gaming machines and harness horse racing facility; and a collaboration agreement with Bet365 Group Ltd, an online gaming company based in the UK.

GENM and KH Realty will respectively seek to establish a 49:51 joint venture to acquire the remaining shares of Empire Resorts, which the said proposals are expected to complete by the fourth quarter of 2019 (4Q19).

On the rationale for this move, GENM said it would better position the Resorts World brand in the northeastern US gaming market through more effective cross-marketing with Resorts World Casino New York City.

Analysts appear to dislike the acquisition as it could dent earnings in the short term and remains unclear on how GENM would be able to reap the potential synergic benefits of this acquisition.

Hong Long Investment Bank Bhd, in a note yesterday, said it is negative on the move in the short term as the acquisition price implies a premium to book value (1.5 times 2018 P/BV) despite Empire Resorts still recording losses.

In the 2018 financial year (FY18), Empire Resorts recorded a loss of US$138 million which was largely attributed to the high start-up expenses incurred for the commencement of RWC (1Q19 net loss widened by 43% year-on-year to US$37.6 million).

The company had also registered losses of US$25 million to US$46 million in the preceding three years.

“Assuming Empire Resorts’ FY20 (full-year impact) registers a loss similar to that of FY18, we note the impact to GENM’s bottom line will be -RM283 million (circa 23% of our FY20 earnings forecasts),” the research house stated.

The investment bank downgraded the counter to ‘Hold’ with a target price of RM3.79 from RM4.21 previously, pending more clarity on Empire Resorts’ earnings outlook.

Public Investment Bank Bhd said the related party transaction was viewed negatively despite GENM claiming it will benefit from potential merger synergies (market positioning, cost savings, etc) between Genting USA and Empire Resorts as details are not readily available to make more conclusive assessments.

“Funding will not be an issue for GENM as it will be supported by its internally generated funds. On face value, however, we are less enthused over the parent company’s tapping of GENM’s cash reserves on non-earnings-accretive ventures,” the research house said.