Wynn Resorts: A Deal May Be Best for All Shareholders
(Bloomberg Gadfly) -- Wynn Resorts Ltd.'s new CEO Matt Maddox has said it would be a mistake to sell or break up the casino operator at a time when the focus is on the scandals surrounding founder Steve Wynn rather than on the business itself. While that reasoning makes sense, I'm not sure I agree with it.
Wynn, 76, said in a regulatory filing Wednesday that he plans to sell all or part of his 12 percent stake in Wynn Resorts, a move that could make the company vulnerable to takeover bids. This potential unwinding of Wynn's ownership follows an ugly, years-long courtroom battle that he was locked in with his longtime ex-wife, Elaine Wynn, which unearthed multiple allegations of sexual misconduct against the King of Las Vegas, including rape. Steve Wynn, who stepped down as chairman and CEO last month, denies the accusations. Investigations by industry regulators in Nevada, Macau and Massachusetts could also determine that Wynn isn't suitable to be the largest shareholder of a casino operator.
Selling the entire $18.6 billion company, should there be offers, may be the best route for all shareholders. Let's walk through why.
At first blush it could seem like the stock has held up relatively well amid all the turmoil. It's gained 7.2 percent so far this year, outpacing the S&P 500 index and some rivals, including Las Vegas Sands Corp.
But then that chart gets flipped on its head when considering that Wynn Resorts' valuation relative to Ebitda and earnings has actually weakened significantly. It's being pulled closer toward its historical two-year low, versus the multi-year high it reached just prior to the allegations being made public.
What this means is, based on the profit growth at Wynn Resorts and the valuation multiple it's ordinarily commanded, the stock should be trading higher. Instead, it's being held back. That is, it's starting to lose the "Steve Wynn valuation premium," as David Bain, an analyst at Roth Capital Partners, called it last month when he slashed his price target and switched to a neutral rating from a buy. That premium, he said, "will take years to recoup, if it ever does."
Or as David Katz of Jefferies Group put it, "The company has lost its visionary and its chief diplomat." That means the board -- which, by the way, has an average age of 68 -- needs to consider the new, more subdued valuation Wynn Resorts may trade at going forward relative to where suitors may value the company. It's a strong business and brand with a foothold in the rebounding Macau market that may be more quickly appreciated by an acquirer than shareholders whose investment case was tied to Steve Wynn as the torchbearer.
A typical takeover premium of around 20 percent would put a deal at above $200 a share. That's not far off its record high set in early 2014, before China's government cracked down on corruption and graft and scared off high-rollers from the gambling hub. In recent quarters, renewed sales growth in Macau has helped Wynn Resorts beat estimates, while Las Vegas recovers from the October mass shooting that left 58 people dead.
Maddox and the board have a fiduciary duty to consider any bona fide offers presented to them. Even if they wish to go it alone and refashion the brand, Wynn's actions and absence have already tarnished the stock for the foreseeable future. It may be better to roll the dice on a deal.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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