Melco should buy Studio City and merge with its parent company, analysts say

Posted: April 30, 2022, 12:51 p.m.

Last update on: April 30, 2022, 05:52h.

Analysts believe Melco Resorts & Entertainment Inc (NASDAQ:MLCO) could support its share price decline by acquiring Studio City International Holdings Inc (NYSE:MSC) and then merging with parent company Melco International Development.

Laurent Ho
Lawrence Ho, CEO of Melco Resorts, during a 2015 interview in Macau. Bernstein says the company should buy Studio City. (Image: Bloomberg)

This take is courtesy of Bernstein analysts Vitaly Umansky and Louis Li. In a recent research report, they note that the aforementioned transactions would unlock shareholder value while potentially preventing the gaming company from losing its Nasdaq listing. .

Melco shares are down nearly 44% year-to-date and 70.35% over the past year. These performances are significantly lower than those of their rivals Las Vegas Sands (NYSE:LVS) and Wynn Resorts – the other two Macau concessionaires listed in the United States.

Bernstein believes Melco is “outperforming,” with a price target of $12.20, more than double the stock’s Friday closing price of $5.72. However, the research firm adds that if Lawrence Ho’s company completes the two aforementioned transactions, the stock price could rise to $15.

Good reasons to consider the offers

Beyond creating shareholder value, Melco, while it hasn’t signaled it is reviewing the deals, has compelling reasons to consider buying out Studio City and merging with its international parent company.

Operator City of Dreams already owns 55% of Studio City, which has also been mentioned by US regulators as a possible candidate to lose its New York listing. Not only would Melco streamline its capital structure with this acquisition, but it would likely get a good deal, as Studio City shares are down 71.44% over the past year.

Such a transaction would result in a revaluation of Melco’s valuation (via an increase in the Studio City multiple and an improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA)) and would add over $2 in shareholder value to our goal of price “, note the Bernstein analysts.

The acquisition of Studio City would also clarify the ownership structure of this company. This is relevant as it is currently considered a satellite casino operator, and under Macau’s new gaming laws all satellite casinos must be owned by traditional licensees within the next three years.

By merging with Melco International, which already owns nearly 56% of the gaming entity, Melco Resorts potentially eliminates the risk of delisting. That’s while possibly expanding its investor base, Bernstein adds.

Avoiding delisting could reduce risk in Melco Resorts stock

Delisting fears arise after the passing of the Holding Foreign Companies Accountable Act (HFCAA) and ongoing geopolitical tensions between the United States and China.

To be fair to Melco and Studio City, they are joined by a slew of other Chinese companies trading in New York that could draw the ire of US regulators.

The problem for the gaming company is that the aforementioned HFCAA requires the audits of foreign companies operating in the United States to be inspected by the US Public Company Accounting Standards Board (PCAOB). However, the PCAOB says it cannot assess Melco’s audits, which are conducted by Ernst & Young, in Hong Kong – the gaming company’s headquarters.

Bernstein previously said the casino operator had options, including a listing in Hong Kong. Shares were previously traded there. But that listing was scrapped in 2015, with Ho noting investors were supportive of the company’s Nasdaq-listed shares.

Melco has not commented publicly on the purchase of Studio City or the merger with its parent company. But it’s clear that Bernstein sees positives in both potential deals.