D-Day for GenM on Tuesday

KUALA LUMPUR: Since the passing of Tan Sri Lim Goh Tong, the late founder of the Genting group, his son and successor Genting Bhd chairman and CEO Tan Sri Lim Kok Thay’s tenure has been marked by an internationalisation of the group.

In an age of globalisation, this internationalisation strategy has taken the Malaysian gaming giant to spread its wings from its comfortable casino base on the lofty peaks of Genting Highlands, Malaysia to the UK, Singapore and soon, the US.

 

After acquiring the UK casino assets in 2006, the group went on to open the high-profile Resorts World Sentosa integrated resort in Singapore on Feb 14 this year, and is now bidding for a racetrack casino in New York City.

 

One of the direct effects of this globalisation drive on equity investors is the key decision that has to be made by minority shareholders of Genting Malaysia Bhd in an EGM on Tuesday.

 

At the EGM, they will decide whether or not to approve Genting Malaysia’s proposed purchase of the UK casino operations from Genting Singapore plc.

 

Genting Singapore shareholders had approved the proposal at an EGM on Wednesday. The deal is set to cost Genting Malaysia £340 million (RM1.68 billion) for the assets that include 44 gaming licences in the UK as well as various properties.

 

Genting Malaysia’s major shareholder Genting Bhd and the parent group’s chairman and CEO, Kok Thay (who also holds a direct 0.28% stake in Genting Malaysia) would not be voting at the Genting Malaysia EGM.

 

Since they are deemed interested parties in the transaction, they would abstain from voting in accordance with stock exchange regulations. The decision thus rests on the larger minority shareholders which, for Genting Malaysia, means some pretty high-powered foreign institutional investors.

 

The top five such minority shareholders are International Value Advisers LLC (2.48%), Vanguard Group Inc (1.38%), Blackrock Fund Advisors (1.27%), Wintergreen Advisers LLC (0.78%) and First Pacific Advisors Inc (0.72%).

 

However, a look at Genting Singapore’s list of minority shareholders also shows some of the same names, such as Blackrock Fund Advisors (0.9%) and Vanguard Group (0.3%), among others.

 

Among the smaller minority shareholders, Fidelity Management & Research holds 0.04% in Genting Singapore and 0.17% in Genting Malaysia; while Credit Suisse Asset Management holds 0.02% in Genting Singapore and 0.14% in Genting Malaysia.

 

The UK casino operations to be transferred are housed under Nedby Ltd, Palomino Star Ltd, Palomino World Ltd and Genting International Enterprises (Singapore) Pte Ltd.

 

Critics have voiced that it is yet another related-party transaction within the gaming group. They also lament that the deal does not create much value for the Malaysian arm and will deplete its cash pile.

 

The knee-jerk market reaction then was to bid down Genting Malaysia’s share price, which fell 12 sen to RM2.62 on July 2, a day after the proposal was first announced. Conversely, Genting Singapore’s share price rose as investors there welcomed the sale.

 

However, Genting Malaysia’s share price has bounced back sharply over the last week, gaining 12% in the past five trading days alone. The stock closed at RM3.07 yesterday, up 3 sen or 1%.

 

UK casinos seen as unexciting for Genting Malaysia

An analyst at a large brokerage-backed research house said on both a price-to-earnings ratio (PER) and enterprise value-to-Ebitda (EV/Ebitda) basis, the UK casino operations looked more expensive than Genting Malaysia’s total business.

 

Acquiring the UK casino operations would bring down Genting Malaysia’s overall valuation numbers, he said.

 

In the letter to minority shareholders dated Aug 9, RHB Investment Bank Bhd (RHB IB), the independent adviser for the proposal, said at market close on Aug 2 and based on consensus estimated FY2011 earnings, Genting Malaysia had an EV/Ebitda of 6.1 times and a PER of 12.9 times.

 

Based on the purchase price of £340 million, the valuation for the UK casino operations on EV/Ebitda basis was 11.2 times, with a PER of 25 times, according to the report.

 

Some analysts also said for the medium term, not much growth would be expected for the UK casino market.

 

Two analysts that The Edge Financial Daily spoke to said separately that among the major dampeners to growth was a smoking ban in enclosed public places that came into effect on July 1, 2007 across the UK. This has been blamed by the industry for reducing revenue.

 

At the same time, growth would be hurt by the uncertain outlook of the UK economy over the next several years, a two-year civil servants pay freeze expected to last well into 2012, and the value-added tax (equivalent to the proposed GST in Malaysia) that has returned to 17.5% effective Jan 1 this year from a temporary reduction to 15% on Dec 1, 2008.

 

Nonetheless, RHB IB recommended shareholders to vote in favour of the proposal.

 

Relating to the EV/Ebitda valuation, the independent adviser said: “Although the implied 2011 EV/Ebitda is above the average EV/Ebitda multiples of comparable companies, we do take into consideration that the proposed acquisition involves the acquisition of a controlling stake in the acquiree group.”

 

RHB IB had calculated an average EV/Ebitda of 9.3 times and an average PER of 19.8 times on a list of 15 comparable companies.

 

The adviser added: “We note that the purchase consideration is fair as the EV/Ebitda multiple implied by the purchase consideration for the proposed acquisition of 11.2 times is within the average EV/Ebitda multiple of comparable listed companies after applying a 20% to 30% control premium of between 11.2 and 12.1 times.”

 

According to an industry source, one reason for the transaction is that the UK casino business is a better fit for Genting Malaysia, while Genting Singapore is focused on getting up to speed and watching the competition with the Las Vegas Sands group that owns the Marina Bay Sands casino.

 

Genting Malaysia’s casino business is a likely better fit for the UK casino landscape in terms of clientele and type of operations, as compared with the integrated resort-style Genting Singapore operations.

 

Moreover, Genting’s entry into the UK casino market was initially based on the premise that the UK government would be liberalising the industry and would allow the construction of similar Las Vegas-style “super casinos” as promised by the administration of former prime minister Tony Blair.

 

However, the idea did not materialise under the Gordon Brown leadership, the industry source added.

 

Tuesday EGM ‘a tougher sell’

The proposed sale of the UK casinos to Genting Malaysia will make Genting Singapore a pure integrated resort play, and strengthen its balance sheet to face competition from Marina Bay Sands and other regional casinos.

 

With the proliferation of new casinos across Asia and the aggressive branding and expansion of Macau as the region’s premier gaming destination, Resorts World Sentosa will need to constantly reinvest and upgrade itself to attract more regional gamblers and high-rollers.

 

Resorts World Singapore will thus face an increasingly competitive environment, to which its Universal Studios theme park — the only one in Southeast Asia — is a big added attraction for the integrated resort.

 

This is much unlike the casino operations in Resorts World Genting, which operates as a monopoly, and caters more to the local crowd with less reinvestment needed.

 

How minority shareholders in Genting Malaysia will decide on Tuesday remains to be seen, but the approval in Malaysia “is a tougher sell” compared to Singapore, said an observer.

 

That key decision could well decide how the wider Genting group plans the next step of its internationalisation strategy.