Morningstar | Melco’s Acquisition of 20% of Crown Will Strengthen its Position in Japan
Melco Resorts will acquire a 19.99% stake in narrow-moat Crown Resorts for AUD 13.00 or USD 9.00 per share and a total value of USD 1.2 billion or 13% of Melco’s existing market cap. The transaction will close on June 6 and on or prior to Sept. 30, 2019 in two equal tranches. Melco is interested in increasing its ownership in Crown and pursuing board representation on Crown’s board after receiving regulatory approval from the relevant regulatory authorities in Australia. We maintain our fair value estimate of Melco at USD 21.00In our view, the acquisition of Crown’s stake will strengthen Melco’s bid for an integrated resort in Japan. One of the weaknesses of Melco in a bid for a Japan integrated resort is its lack of experience when operating in a strictly regulated regime with high concerns about gambling addiction. Crown has a long history of operating in Australia. Its slot machine expenditure is among the highest globally on a per capita basis. Melco will be able to learn from Crown in this regard. Similar to the partnership between Galaxy Entertainment and its investor Monaco-based casino operator Societe des Bains de Mer, we see the potential for a collaboration between Melco and Crown in Japan. Given the expectation of a high-quality integrated resort in the metropolitan area of Japan, the purchase also improves Melco’s status as a global, premium casino operator in developed countries with iconic properties. However, Melco and Crown are not known for their meetings, incentives, conventions and exhibitions, and this would still be a big disadvantage in a bid in a large city, likely Osaka, in Japan. We continue to view Las Vegas Sands and MGM Resorts.
We believe Melco Resorts is investing in a quality asset at a fair price. Morningstar’s fair value estimate of Crown is AUD 15.00 per share and at AUD 13.00 per share, the stock is fairly valued. Crown Resorts has the exclusive licence to operate its casino in Melbourne until 2050 and in Perth until 2060. Crown has one of only two gaming licences in Sydney and is expected to open in fiscal 2022. The duration of the Sydney licence is 99 years. The licensing regime creates a legal barrier to entry that gives Crown Resorts a narrow moat.
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