Apprentice范硕卿月赛.doc

Apprentice FCAC 2009The 12thFinancial Case Analysis ContestAnalysis ReportCase Name：Melco Entertainment LimitedReport Title：Financing, IPO or M&A?Team Name：ApprenticeDATE: 2009. November ContentsContents2Part 1：Melcos Background41.1 Melco Overview in 200741.2 Melcos Business51.2.1 Business Developed51.2.2 Business Developing71.3 Macaus Gaming Industry81.4 Reasons to Melcos IPO & MGMs M&A81.5 Melcos Finance Situation9Part 2 ：Melcos IPO112.1 What is IPO112.2 IPO for Melco112.3 Choose A Stock Exchange Market132.4 Evaluate the Market Capitalization by IPO142.4.1 Estimation of PE ratio142.5 Get New Equity Structure16PART 3：Equity Value from Future Cash Flow183.1 Equity Value from Future Cash Flow183.2 Calculate the WACC183.2.1 What is WACC?183.2.2 Capital Asset Pricing Model (CAPM)203.3 Calculate Future Cash Flow213.3.1 Predicted income statement213.3.2 Cash flow from assets223.3.3 PV of cash flow from assets233.4 Calculate The value of equity233.4.1 Cash flow to creditors243.4.2 The value of equity243.5 The Value to Former Shareholders24Part 4: MGMs M&A Plan254.1 MGMs Plan254.2 The Advantage & Disadvantage of M&A26Part 5: Finance Strategy：IPO or M&A275.1 Three Aspects to Evaluate275.2 Profitability Assessment285.3 Feasibility Analysis285.4 Risk Evaluation295.5 Comprehensive Assessment29End30Part 1：Melcos BackgroundMain point：1. What is Melco？2. What is Melco main business, developed and developing？3. How is the Macau Gaming Industry?4. The reasons of Melcos IPO & MGMs M&A (Mergers and Acquisitions)？5. How is Melcos Finance Situation now？1.1 Melco Overview in 2007 Melco Crown Entertainment is an owner and developer of casino gaming and entertainment resort facilities that are focused on the rapidly expanding gaming market found in Macau. The Company operates superbly designed and managed facilities through its subsidiary Melco Crown Gaming (Macau) Limited, one of only six companies granted concessions or sub concessions to operate casinos in Macau.Through the implementation of innovative products and services and by work in hand-in-hand with globally renowned brands, this Company fully intends to offer the best entertainment experience to the broadest spectrum of customers and thereby become the leader of Macaus gaming industry. In this endeavor, they have a number of projects currently underway or planned in the region.1.2 Melcos Business1.2.1 Business DevelopedLets see the table first:BUSINESSNAMEBUSINESSLOCATIONTARGETCUSTOMERSTARTDATERoyal, MochaRoyal HotelVIP segment2003.09.29Kingsway, MochaGolden Mile Business CenterDay trippers2004.01.05Taipa Square, MochaHotel Taipa SquareMulti-night visitors2005.04.29Sintra, MochaSintraMulti-night visitors2005.11.18Taipa, MochaGrand HotelMulti-night visitors2006.01.20Marina, MochaSea Crown CenterMulti-night visitors2006.11.30Crown MacauCrown MacauVIP segment2007.05.12Mocha SQMacau JinbiVIP segment2007.10.04In the table, there are the business which Melco runs now. Three kinds of customer are targeted by Melco.1. Day Trippers: Generally drove to a casino, played for most of the day and ate at one or more of the low-priced restaurants;2. Multiple nights Players: Who made use of the adjoining hotel, ate at fancier restaurants and enjoyed the casinos other offerings, such as golf and theatrical shows;3. VIP Customers: Who were the highest-margin segment. They bet large sums of money, stayed in the best hotel suites, ate at the best restaurants and made the most use of properties amenities. Casinos were generally designed with one or two of these segments in mind.And in different Resorts, Melco offer various service. Here is the detail information. Altira Macau (formerly Crown Macau) is a luxurious and contemporary hotel and casino delivering a world-class experience. It offers one of the most exclusive and elegant accommodations in Macau, providing the ultimate in fine dining and attracting discerning, high-end gaming patrons. Situated in the heart of Taipa, with spectacular panoramic views of the Macau peninsula, Altira Macau is an oasis of sophistication created by world-renowned interior designers. This jewel of Macau offers stylish elegance and comfort along with impeccable service tailored to your every desire.The stunning 38-storey complex features 216 lavishly appointed guest rooms, including 24 VIP suites and 8 elegant villas, all offering breathtaking vistas of the Macau peninsula.Altira also provides a host of world-class culinary experiences, chic lounges and a luxurious day spa. To provide instant electronic gaming fun, our Company offers Mocha Clubs. With eight Mocha Clubs already in operation throughout Macau and Taipa, Mocha Clubs offer machine-based gaming entertainment in a cafe-style setting. Finally, our Company also has ambitious plans for a yet-to-be-named hotel-casino complex on the prime real estate of the Macau Peninsula. 3 Main Characters：-Pioneer of Macau Electronic Gaming Entertainment. -One of the largest Electronic Casinos in Macau. -Distinctive Electronic Gaming Entertainment Experience. 1.2.2 Business DevelopingThe table below shows the Project that Melco is planning to develop.BUSINESSNAMEBUSINESSLOCATIONTARGETCUSTOMERSTARTDATECity of DreamsCity of DreamsDay trippersPlan in 2009City of Dreams, MochaCity of DreamsVIP segmentPlan in 2009The New Port Outport ProjectNew Macau PortAllPlan in 2010Macao Studio City project within the entertainment fieldMacau Studio CityAllPlan in 2010Here is the detail information in Melcos future Planing.City of Dreams, another property of the company, is a must-see integrated urban entertainment resort that will combines electrifying entertainment, stylish nightclubs, an amazing array of accommodation options, top-notch dining, designer brand shopping as well as a spacious and contemporary casino. The initial phase opened on June 1, 2009. When fully opened, City of Dreams will offer approximately 2,200 guest rooms and a wide range of restaurants and bars, a kaleidoscope of entertainment options including free attractions and the spectacular Dragone show. 4 Main Characters：-Live the Dream. -New dimensions in entertainment. -Dream-like sensation. -The Splendor of Dragone. 1.3 Macaus Gaming IndustryMacaus economic prosperity in the past decade largely depended on its soaring gambling industry. Besides Macaos liberalized industrial policy on gambling business, mainland Chinas high-speed growth and policy support were crucial factors for Macaos economic growth. In 2006, Macao became the largest casino city in the world with US$7.2 billon gross gaming revenue. The figure increased to a historical record high of US$13.7 billion in 2008.At present, Macao has six gambling enterprises: Galaxy Casino, S.J.M., Melco Crown, MGM Grand Paradise, Venetian Macau, and Wynn Resorts. American capital has been injected into the latter three enterprises.The sustainable development of Macaos gambling industry is also facing challenges from Mainland Chinas policy restrictions. Fearful that an overexpansion of the gambling business would hurt Macaos social and economic stability, the Chinese government has tightened its previous supportive policies to cool down Macaos gambling industry.1.4 Reasons to Melcos IPO & MGMs M&AMelco had recently announced plans to file for an initial public offering (IPO). With the announcement came buzz that a big player in the gaming industry might attempt to acquire the firm before it went public. Only two weeks after the Melcos announcement, the chief executive officer (CEO) of MGM Mirage (MGM), Matt Montemurro, contacted Melcos board of directors to indicate his interest in striking a deal. Montemurro mentioned that MGM would be willing to pay $8 billon for Melcos equity. However, this was not a formal takeover offer, and Montemurro had not disclosed how MGM would finance the deal. Melcos board of directors had hired GM Capital to perform valuation analysis and provide strategic advice. Melcos IPOMGMs M&AInternal ReasonsExternal ReasonsInternal ReasonsExternal ReasonsFinance money for the new business development in the future;Many gaming companies in Macau already have IPO;Enhance the companys business;Enlarge the Market Share in Macau Gaming Industry;One of the shareholder is going to withdraw the capital.IPO can make the company much more impressive to the public.Eliminate a main Rival in Macau.Rise Reputation of the Whole Industry.The board, tasked with maximizing shareholder value, wanted to know whether to follow through with an IPO and how to respond to MGMs overtures.1.5 Melcos Finance SituationBefore Melcos make decision between IPO & M&A, lets analyze its finance situation first.According the data Ivey given, we use the Du Pont AnalysisFinance situation in 2007 & 2006According to the table we may see the ROE is 15.42% now. In the near future, the new event City of Dream will bring new sales to Melco. We believe that if Melco can manage well with its Total Assets, then the ROE will keep growing in the following years of course.Part 2 ：Melcos IPOMain point：6. What is IPO？7. Which Market should Melco go？8. What is the Price and Volume of Melcos IPO？9. How much is Melcos Value after IPO？10. Whats the new Share Structure？2.1 What is IPOAn initial public stock offering (IPO) referred to simply as an offering or flotation, is when a company issues common stock or shares to the public for the first time. They are often issued by companies seeking capital to expand, or looking to become publicly traded.When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order at the same time. The money paid by investors for the newly-issued shares goes directly to the company. An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution.2.2 IPO for Melco Melco PBL Entertainment Limited, shorter form Melco, is a Macau company operating seven slot parlors with more than 1,000 slot machines in total, under the banner of Mocha Clubs. In December 2007, Melco announced plans to file for an initial public offering (IPO). Its a great opportunity for Melco to expand the capital and develop itself.Melco was owned by three entities. Melco International Development Ltd. and Publishing and Broadcasting Ltd. each owned 41 percent and the remaining 18 per cent was owned by venture capital firm, Guggenheim Group (Guggenheim). It was understood that the first two companies were not in a rush to exit their investment but Guggenheim was seeking to sell half of its stake (nine per cent of Melco) to redeploy capital toward start-up businesses. So if Melco is listed on a public exchange market successfully, Guggenheim would have a good opportunity to exit their investment.Objectively speaking, IPO is a double-edged sword. The advantages are obvious: IPO is one of the best methods to finance in public. And it would give financial markets the opportunity to evaluate Melco and establish a clear value for the firm. Follow-on offerings, in which Melco would sell additional shares to the public, would be a distinct likelihood in subsequent years. Whats more, with an IPO, the management of Melco could raise the firms standing in the industry.On the other hand, the IPO was a long, complicated and time-consuming process which would be cancelled at any time if plans change. Once theres any accident in the process, the cost would immediately become sunk cost. The exact pricing of IPOs is also a big problem. Based on market demand, the price is not known until the day Melco is taken public. And a vital problem cannot be ignored, thats the under pricing. Under price of IPO has been well documented in different markets, thats a discount to the true (end of first day publicly traded price) equity value. It has puzzled numbers of economists. Consequently, its generally accepted that this discount is required as compensation to investors for the uncertainty surrounding an investment in a security that lacks a track record on the public markets. On average, the discount is 15 percent.Other fee: a 7% investment banking fee would apply to the post-IPO discount value of the equity being sold.2.3 Choose A Stock Exchange MarketFor most Gaming Companies, there are 4 common choice， which are OTC in Taiwan、GEM in Hong Kong、NYSE & NASDAQ in USA.Here is the table.Company NameStock Exchange ChoiceMPELNASDAQWYNNNASDAQMGMNYSELVSNYSECNTYNASDAQUWNAMEXASCANASDAQTWOCOTCTRMPQOTCPNKNYSEWMSNYSEBYINYSEFNETNASDAQPTEKNASDAQMGAMNASDAQSHFLNASDAQGMTCNASDAQFLLAMEXLACONASDAQISLENASDAQPENNNASDAQGBCSOTCDDENYSEAmong all most companies choose Nasdaq, due to several reasons.Other Stock Exchange have a higher Threshold in IPO;The Seed Money is required lower；The Required Operating Period is shorter.As the following reasons，we suggest Melco should go to NASDAQ for its IPO.2.4 Evaluate the Market Capitalization by IPO2.4.1 Estimation of PE ratioEstimation of PE ratio is an easy but effective way to evaluate the issue price by PE ratio, and its widely used by many investors. Here we have the data of some entertainment companies listed in NASDAQ. CompanyShare PriceShares Outs. (millions)Market Cap. (millions)Total Enterprise ValueNet Income 2007MGM Mirage$92.69299.4$27,749.5$41,569.3$1,784.3Harrahs Entertainment$87.30187.6$16,375.7$28,013.7$1,140.1Las Vegas Sands$118.76355.2$42,177.6$47,789.2$2,107.2Eastern Star$14.76320.8$4,735.0$4,788.4$149.9Wynn Resorts$134.50114.3$15,376.0$14,098.8$881.6Table 1From table 1, we can get the earning per share as follows:CompanyEPSMGM Mirage5.96Harrahs Entertainment6.08Las Vegas Sands5.93Eastern Star0.47Wynn Resorts7.71Table 2Then, we can get the PE ratio by the formula PE ratio =Share Price /EPS, the results are as follows:CompanyPE ratioMGM Mirage15.55Harrahs Entertainment14.36Las Vegas Sands20.02Eastern Star31.59Wynn Resorts17.44Table 3After that, we can get average PE Ratio (19.79) and statistical dispersion (6.93). So we can use a software Crystal Ball to stimulate the process and get the market capital. The graph is as follows:The Market Capitalization=3137.81(million USD).If we take under price and the 7% investment banking fee into consideration, then the Market Capitalization=3137.81*(1-15%) *(1-7%) =2480(million USD)2.5 Get New Equity StructureEquity Structure Before IPOEquity Structure After IPOPART 3：Equity Value from Future Cash FlowMain point：11. How can we get the Equity Value from Future Cash Flow？12. Calculate the WACC.13. Calculate the DCF.14. Calculate Equity Value to Shareholders.3.1 Equity Value from Future Cash Flow3.2 Calculate the WACC3.2.1 What is WACC?First ,we need to know what WACC is, and then, we will undertake to make an analysis in this company. A calculation of a firms cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: WACC=(E/V)*Re+(D/V)*Rd*(1-Tc)Where: Re = cost of equity Rd = cost of debt E = market value of the firms equity D = market value of the firms debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Broadly speaking, a companys assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. A firms WACC is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.Just with this quotation ,we still cant get the final result, because there are many parameters which are unknown. Read the case again, we can find many clues.One of the very important parameters is Re, the cost of equity. Hereby, we have to make use of a very important financial model, that is CAPM.3.2.2 Capital Asset Pricing Model (CAPM)A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amou