MGM shares fall as Barry Diller retracts takeover bid

MGM shares have fallen markedly since Diller’s offer was lodged in June.

On Wednesday, MGM Resorts confirmed that an $18 billion takeover offer from its largest shareholder, Barry Diller’s People Inc, which was lodged in June, has been rescinded, with both sides expressing confidence in the operator’s ability to continue as a standalone company.

Shares of People Inc were essentially flat in trading on Thursday while MGM slid 11% to about $33.50. Diller’s offer to acquire the 73% of MGM that People Inc didn’t already own for $48.30 per share drove the stock up to around that price when the offer was made public, but fading optimism has since brought shares down nearly 25% over the last month. Diller would have taken MGM private but it would have lived under People’s public portfolio.

When the offer was lodged, the 84-year-old Diller lauded the appeal of MGM’s tangible assets in a business landscape that is increasingly being driven by technology and AI-related hype. Although a deal was not reached, Diller noted that People Inc remains “open to” future discussions.

“There are lots of ingredients that go into a proposal of this kind on its way to completion,” Diller said in a statement. “We didn’t feel the mix was coming together in the way we had hoped and have decided not to pursue taking the company private at this time.”

Conversely, MGM Chairman Paul Salem said in his own statement that the board “remains excited” to continue MGM’s path as an independent company. The operator’s “leading position in Las Vegas, our best-in-class regional properties, and BetMGM’s continued momentum highlight the value we bring to our shareholders”, he asserted. In his remarks, Salem additionally pointed to MGM’s strength in Macau and its MGM Osaka venture, which is set to open in 2030.

Analysts unshaken

In the aftermath of the news, analyst reactions were somewhat muted. Chad Beynon of Macquarie maintained an “Outperform” rating while Barry Jonas of Truist maintained a “Buy” rating – both analysts set a price target of $55.

Beynon’s note highlighted the financial difficulties of completing the massive deal. His view was that “the outcome was driven by financing complexity rather than any change in the underlying value of MGM”. The operator’s implied enterprise value of about $5.9 billion is “a striking discount” given MGM’s diverse range of land-based and digital assets, Beynon wrote.

To Beynon’s point, the US money market is becoming increasingly murky. Inflation remains high and the Federal Reserve raised interest rates for the first time in three years this month, with the expectation of at least one more hike before year’s end. US Treasury yields are rising, with the 30-year yield reaching its highest point since 2004 on Thursday, per CNBC.

Financing costs are a key factor in Fertitta Entertainment’s acquisition of fellow operator Caesars Entertainment, which, at a total value of $17.9 billion, is similar to the proposed MGM deal. Fertitta stood firm on its $31-per-share offer due in part to financing costs for the $6.6 billion package it had agreed to. Company executives also told regulators in July that it was waiting for a more favourable lending environment, which has not materialised.

Jonas, meanwhile, said the dissolution of a deal for MGM was not a surprise given the company’s share decline relative to the offer price. Additionally, Jonas noted “the regulatory complexity of a company like MGM” could have been too much of a burden for People Inc to stomach given its lack of other gaming ventures.

Where does MGM go from here?

Moving forward, MGM has a lot of moving pieces to consider as it forges ahead sans Diller. In Las Vegas, the company has performed well on the higher end, but its budget offerings have struggled. MGM posted $2.2 billion in Q2 Las Vegas revenue and $735 million in adjusted EBITDA, but executives had to withstand a barrage of questions from analysts about the market.

COO Ayesha Molino told analysts that MGM continues “to see really strong strength in the luxury segment”, but its lower-end properties, “particularly Luxor and Excalibur, remain challenged”.

On the regional side, same-store quarterly revenue hit a record $904 million in Q2. Meanwhile, its Maryland casino, MGM National Harbor, is poised to benefit from the construction of a new Sphere venue nearby, although that is not projected to open until 2030. MGM Springfield in Massachusetts is drawing increased scrutiny and was sued by the city of Springfield over alleged breaches of the host community agreement between the two sides. The company was also in contention last year for a full commercial licence at its Empire City racino in New York but ultimately withdrew its application.

MGM’s digital efforts through its BetMGM joint venture with Entain are well-established but could be approaching a crossroads. BetMGM has refused to dabble in prediction markets out of concern for MGM’s casino licences, while competitors like FanDuel, DraftKings and Fanatics have jumped in head first.

In Asia, MGM China has been relatively stable in Macau but much of the emphasis has been on MGM Osaka. The under-construction project is the sole licensee in Japan, but is still four years away from opening. Japanese officials have also confirmed that another round of licence bids will open next year, potentially increasing future competition.