his was the biggest block trade in Asia since the market turbulence in August and was completed at more than twice the price per share that Permira paid for a 20% stake back in 2007. This deal will reduce its current holdings from 19.3% to 12.8%.
In a press release issued late last night, Permira noted that Galaxy has been a “very successful investment for the firm to date” and said the long-term growth potential, both for the company and for Macau, remains attractive.
“We are confident of further appreciation in the value of the company and the investment. As such, the Permira funds currently have no immediate plan to dispose of further shares in the company and intend to continue to hold the remaining shares as long-term investment,” it said.
This would have made the deal even more interesting for potential investors as it indicates that there is unlikely to be another block of shares hitting the market anytime soon. There had been speculation that the firm would start to monetize its holdings following strong share price gains this year, since it is a private equity firm and hence would want to secure a return on its investment.
Permira initially offered 220 million shares with the potential to sell another 130 million shares in case of strong demand. The price range represented a discount of 3% to 5.1% versus yesterday’s close. Morgan Stanley was the sole bookrunner for the transaction.
Considering that Galaxy’s share price has gained 13.2% this week (even with a 4.2% drop yesterday as some investors took profits on the back of the strong earnings), the discount looked tight. Galaxy has also outperformed the other Macau gaming stocks with a 112% gain this year and is currently trading only 14.6% below its record high from August 1, meaning it has weathered last month’s downturn in global markets relatively well.
But it turned out investors were still keen to get a piece of the action and demand was strong enough to upsize the deal by 50 million shares to 270 million. At that size, the deal represents 6.5% of the share capital and about 14 days’ worth of trading, based on the average turnover in the past three months. Not too surprisingly, however, the deal was priced at the bottom of the price range for the maximum 5.1% discount.
According to a source, the deal was covered in 45 minutes and the bookrunner was able to close the order books in about two hours. In that time, more than 65 investors came into the deal. The buyers were a mixture of long-only accounts and hedge funds, primarily out of Asia and the US.
Galaxy’s strong first-half earnings report, which confirmed that the company had managed to generate positive operating earnings from its new Galaxy Macau casino resort almost from day one, prompted several houses to raise their target prices for the stock and, as of yesterday, 18 of 24 analysts had a “buy” on it.
Earlier in the day, the Macau Gaming Inspection and Coordination Bureau also reported that casino revenues in Macau rose 57% to us$ 3 billion in August. In the first eight months this year, the city’s six casino operators have generated about us$ 21 billion worth of gambling revenues, which is up 47% from the same period last year.
Another positive is that the liquidity in the stock will improve as a result of this deal, which accounted for 20.7% of the free-float. Galaxy is still about 52% owned by the family of founding chairman Lui Che-woo and its associates.
Permira bought a 20% stake in the company in October 2007, paying a total of us$ 840 million. At the time, this translated into a modest 6.4% discount versus the market price.
Galaxy was Permira’s first direct investment in Asia outside Japan, but the private equity firm’s long history of gaming-related investments elsewhere was a significant endorsement for the Hong Kong-based company and its growth strategy in Macau, where it is competing against US casino magnates Sheldon Adelson and Stephen Wynn, as well as Macau’s own gaming tycoon, Stanley Ho.
The investment also left Galaxy with a substantially improved balance sheet and enough funds to provide a foundation for the development of the us$ 2.1 billion Galaxy Macau resort, which opened on the Cotai strip in May this year.
Permira made its investment on an unleveraged basis, but said at the time that it still expected the same size returns that it would target from a leveraged deal elsewhere in the world — typically 20% to 25%. For a long time that looked like it might be difficult to achieve. During the financial crisis, which caused a delay in the development of Galaxy Macau, the share price fell to as low as us$ 0.07 and at the beginning of this year the stock was still trading below us$ 1.28. But since early March, when positive reports of the pending casino opening started to appear alongside a continued improvement at its StarWorld casino, the share price has shot higher.
Last night’s sale implied a 110% return before costs over a four-year period and allowed Permira to “recover a substantial part of the initial investment cost, while keeping the majority of the stake to capitalise on further growth in the business”, the firm said. It still owns approximately 528 million shares, which at the current shares price is worth close to us$ 1.3 billion. Its remaining shares will be locked up for three months.
Galaxy said on Wednesday that its revenues increased by 60% to us$ 1.75 billion in the first half, while its Ebitda improved by 84% to us$ 233.7 million. Net profit fell 20% to us$ 48.5 million, weighed down by us$ 98.5 million of pre-opening expenses for the Galaxy Macau and a us$ 21.1 million non-cash fair-value change related to its outstanding convertible bonds. Adjusted for these, and other non-recurring items, net profit improved to us$ 166.9 million from us$ 77 million a year earlier.
Galaxy Macau generated an Ebitda of us$ 48.2 million in the first 47 days after its May 15 opening, while StarWorld delivered its 12th consecutive quarter of Ebitda growth in the three months to end-June and a record half-year Ebitda of us$ 166.9 million.
In a written comment about the results, chairman Lui noted that “the growth of the company shows no signs of slowing and with the largest contiguous landbank in Cotai, Galaxy is well positioned to capitalise on the growth of Macau.”