Melco Resorts Flips Roles With Crown Resorts
It was only two years ago that Crown Resorts sold its founding stake in Melco Resorts (NASDAQ: MLCO), formerly known as Melco Crown, for $1.16 billion. Now Melco is buying a 19.99% stake in Crown Resorts for $1.22 billion, turning the tables on a company that made its existence possible.
James Packer, who owns a controlling interest in Crown Resorts, is actually the one selling a portion of his stake, continuing a trend of cashing in on his remaining assets (as he did with Melco Resorts). The deal gives Packer cash and diversifies Melco Resorts' business, but it may be a more strategic move than it first appears.
Melco Resorts' big move
Melco Resorts doesn't have a history of big acquisitions in gaming, but it has been preparing itself for a deal like this for a while. You can see below that it's generating billions in EBITDA, a proxy for cash flow from resorts, each year and keeps a relatively low level of debt.
This gives Melco ultimate financial flexibility if new opportunities pop up in gaming. Crown Resorts is one of Australia's largest gaming operators and will give the company access to a new market. That's an attractive diversification for a company that makes most of its money in Macau. Regulators will have a final say as to whether the sale can take place while Crown keeps all of its gaming licenses, but for now the deal looks like a good way for Melco Resorts to expand.
Blocking a hostile takeover
The benefit for Packer and Crown Resorts is that Melco Resorts' stake brings a well-capitalized gaming company into the fold to fend off potential acquirers. Last month Wynn Resorts (NASDAQ: WYNN) reportedly approached Crown Resorts about a $10 billion buyout, which was ultimately turned down. But Packer may have felt heat to bring in another gaming company if he was going to turn down such an offer.
This doesn't mean that Wynn Resorts can't pursue an acquisition later, but it will make acquiring the company more complicated, and Melco Resorts will likely have a leg up in potentially acquiring the entire company.
Other than holding off a Wynn takeover and raising cash for Packer, there wasn't a huge long-term benefit for Crown Resorts. The sale didn't happen at a big premium, as acquisitions often do, so investors could still be disappointed that a better offer from Wynn may have been turned down.
Melco Resorts is the big winner today
For a relatively small investment, Melco Resorts has gained a foothold in Australia's gaming market and straight-armed an expansion attempt by Wynn Resorts. That's a big win for Melco Resorts, which doesn't have a lot of organic expansion options with the cash it's generating each year. This is one way to keep the company growing and potentially get an attractive gaming asset at a discount.
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Travis Hoium owns shares of Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.