Following the departure of legendary casino mogul Steve Wynn from his Wynn Resorts, Limited (NASDAQ: WYNN) earlier this year, speculation is growing as to whether one of the other casino companies will make a run at WYNN. Las Vegas Sands Corp. (NYSE: LVS) would certainly seem to be one possibility.
Steve Wynn has sold off his stake in the company he founded. And his former wife is unlikely to stand in the way of an acquisition, given that she can cash out of her holdings in the process. It makes this scenario seem very reasonable.
The first thing I look at in this situation is whether an acquisition would even be feasible. Wynn Resorts has a $20 billion market cap and had operating income last year of $1.06 billion. This was nearly double the amount for 2016. The multi-year nightmare of Macau seems to finally be coming to a close. The Chinese government appears to have finally backed off on its crackdown on rich people who go and play big-money tables and Macau.
WYNN is sitting on a little over $3 billion in cash, with long-term debt at $9.56 billion. That debt set the company back $389 million in interest payments in 2017. However, the good news is the company finally generated positive free cash flow again, to the tune of $940 million last year. This came after several years of negative free cash flow.
Wynn Resorts stock has a valuation of $19.9 billion. That’s a little over three times revenue, almost eight times gross profit, and almost 20 times operating income.
Las Vegas Sands Stock Valuation
Las Vegas Sands stock has a valuation of $56 billion. However, the valuation metrics for LVS stock are quite different. LVS stock has a valuation of 4.3 times revenue, about 8.8 times gross profit and almost 14 times operating income. However, there is a critical difference between Las Vegas Sands stock and its potential target. LVS stock has a far more diversified business than Wynn Resorts has ever had.
Las Vegas Sands does not merely own one resort in Macau. It owns The Venetian Macau Resort Hotel, the Sands Cotai Central, The Parisian Macau, The Plaza Macao and Four Seasons Hotel Macau, Cotai Strip, and the Sands Macao in Macau; and Marina Bay Sands in Singapore. The company also owns and operates The Venetian Resort Hotel Casino and The Palazzo Resort Hotel Casino on the Las Vegas Strip; the Sands Expo and Convention Center in Las Vegas; and the Sands Casino Resort Bethlehem in Bethlehem, Pennsylvania.
Consequently Las Vegas Sands stock has had robust operating income for several years, hitting $3.46 billion in 2017 alone. It has also had plenty of free cash flow over the years. In 2015, it generated $1.9 billion in free cash flow. In 2016, it generated $2.6 billion in free cash flow and 2017 resulted in $3.7 billion in free cash flow. Las Vegas Sands stock price is also holding up well because it carries about $2.4 billion in cash and $9.3 billion in debt, costing at $327 million annually in interest payments.
Potential Impact on Las Vegas Sands Stock
I don’t see any reason why management must go after Wynn, but the acquisition would certainly make sense. It would help to further establish its presence in both Las Vegas and Macau — arguably, when stock is cheap in terms of valuation based on revenue and gross profit.
I could see a modest 10% premium being offered to shareholders — especially considering that their legendary and visionary CEO is no longer at the helm. What does a $22 billion purchase look like? It’s probably an all-stock deal. Las Vegas Sands stock owners would have to assume Wynn resorts debt on top of the $9 billion they already have themselves.
The one obstacle is that it could result in about 30% dilution of Las Vegas Sands shareholders. The question then is whether they are getting 30% value added to their company. As it turns out, that is the case — 30% of $3.46 billion of operating income for Las Vegas Sands would be matched by the $1.06 billion in operating income it wins.
So I certainly see this as a possible play for Las Vegas Sands. The question is whether MGM resorts is going to compete for that bed, as I suspect it will.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Meyers is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years of experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].