NEW YORK, Aug. 10, 2020 /PRNewswire/ -- IAC (NASDAQ:
IAC) today announced its accumulation of a 12% interest in global
hospitality and entertainment company MGM Resorts International
(NYSE: MGM) for an aggregate of approximately $1 billion.
"With the separation of Match Group from IAC, and 'new' IAC
emerging with $3.9 billion of cash,
no debt, and its opportunistic zeal intact, we are energized and
excited to make this investment in MGM. What initially attracted us
to MGM, besides its leadership in leisure, hospitality and gaming,
was an area that currently comprises a tiny portion of its revenue
– online gaming," said Barry
Diller, Chairman and Senior Executive of IAC. "IAC's
foundational concept of seeking opportunities to build interactive
businesses is our base rationale – there is a digital first
opportunity within MGM Resorts' already impressive offline
businesses, and with our experience we hope we can strongly
contribute to the growth of online gaming."
"MGM Resorts presents a unique opportunity for IAC to own a
meaningful piece of a preeminent brand in a large category with
immense potential to move online," said Joey Levin, CEO of IAC. "We will be a
minority investor and a long-term strategic partner, and would
welcome the opportunity to contribute to MGM's success in any way
that MGM's Board would look favorably on our
involvement."
IAC published a letter to shareholders today, outlining the
rationale for its investment in MGM Resorts in more detail. The
letter in its entirety is below.
August 10, 2020
Dear Shareholders,
Over the last few months we've accumulated a 12% interest in MGM
Resorts International ("MGM") for an aggregate of approximately
$1 billion. Investors reading
that prior sentence may be surprised by some, or quite possibly
all, of its components. First, we accumulated a large
minority position in a public company, which is not our usual
methodology. Second, the securities we purchased are common
equity securities, the exact same securities that any investor with
exactly $19 could buy and sell any
day in the market. Third, we bought securities in a business
that has relatively little to do with the Internet today.
Fourth, we invested a portion of our cash in a new direction for
IAC. The answer to all four of those concerns is that we
believe MGM presented a "once in a decade" opportunity for IAC to
own a meaningful piece of a preeminent brand in a large category
with great potential to move online. IAC has always been
opportunistic with its capital, and if ever there was a time, this
moment is unique. We believe we can generate compelling
returns for our shareholders and hope our expertise will be
additive to MGM's opportunities, but even if we never advance our
involvement from here, the value was too compelling to
ignore. Having taken this step, we have a very long-term view
of this investment and will be open to all the opportunities it
presents along the way.
MGM is a leader in gaming, hospitality, and leisure with a
storied brand and an enviable market position. The current
pandemic brought revenue (though not expenses) to a temporary halt,
and required MGM to repurpose cash it had wisely stockpiled for
share repurchases to instead defend the solvency of the
company. The good news is, we believe MGM has enough cash and
access to capital to make it to the other side competitively
stronger.
When the world returns to normal, MGM will be just as capable
post-pandemic as it was pre-pandemic in servicing visitors in over
35% of the Las Vegas Strip's available rooms, plus eight regional
properties across the US, two in Macau, and hopefully in Japan. The 34
million members of MGM's loyalty program still have their M-life
Rewards, and we're confident that many are eager to return to the
properties they love. And when Las
Vegas fully re-opens – even if it must wait until a vaccine
for that to occur – we expect it to roar back: a new NFL team, a
new stadium, a drivable destination, and months of pent-up demand
could drive a powerful resurgence.
But that's not what originally drove us to MGM, nor in large
part drove our final decision to invest. We have a history
and much experience in online commerce. So we began our
analysis with a focus on a small piece of MGM, a portion of its
revenue so small that it rounds down to zero: its online gaming
revenue. We've followed the online gaming space for a while,
looking for an opportunity to enter, but we were generally
unsatisfied with the landscape we saw. The regulations in
this $450 billion global industry,
with less than 10% U.S. online penetration, have required a
physical presence and geographic boundaries in each state to
operate the product consumers demanded – anathema to the borderless
environment in which we've operated our businesses. To
operate true sports betting and digital gaming, a provider is
currently required to partner with a local casino operator.
And while we believe that regulatory environments generally catch
up with consumer demand, it's taken quite a while in this category,
so we found one of the leading players operating in 7 going on 11
states by the end of 2020: MGM, which pairs a strong physical
presence and brand with talented online operators in a fast-growing
joint venture in online gaming. Similar to Disney's
advantages over pure-play streaming companies with an iconic brand
and multiple avenues to monetize the same intellectual property
between streaming, theatrical releases, merchandise, and theme
parks, we believe MGM also is an aspirational brand, which could be
delivered with daily accessibility and offer gaming consumers
(including the 34 million M-life Rewards members) a wider range of
services, both physical and digital, than any competitor. And
MGM, with its highly capable joint venture partner GVC, has only
just barely begun to deliver these products.
Our history in driving off-line to on-line conversion gives us
confidence in the path and, like other industries we've seen
transform, a conviction that it will be assisted by natural
tailwinds.
Industry
|
Relevance
|
Year of
Acquisition/
Investment
|
US Online Market
in Year of
Acquisition/Investment
|
US Online Market
in 2020
|
Dating
|
Match
Group
|
1999
|
0
Subscribers
|
10M+
Subscribers
|
Ticketing
|
Ticketmaster
|
2001
|
$1 Billion
|
$13
Billion
|
Travel
|
Expedia
|
2002
|
$9 Billion
|
$1.1
Trillion
|
Homeservices
|
ANGI
Homeservices
|
2004
|
2 Million Service
Requests
|
29 Million
Service Requests
|
|
|
|
|
|
Gambling
|
MGM
|
2020
|
$6
Billion
|
|
Turns out, MGM also has a $2.5
billion EBITDAR (a gaming industry metric designed to
reflect profitability before taxes, capital expenses, and real
estate expenses and simplify comparisons between those
operators that own real estate and those that do not)
operation domestically that comes alongside the opportunity in
digital sports betting and table games, at a normalized free cash
flow yield over 10%. This combination doesn't exist in any
growing internet opportunity.
As we looked further into MGM, we recognized a familiar
sum-of-the-parts story with publicly-traded subsidiaries.
MGM's implied "stub" – the domestic business without the real
estate – trades at an implied value of nearly zero. That's
not unlike IAC's "stub" – which is perennially valued at zero (or
less). When we saw the collection of well-run businesses
(check), a sturdy balance sheet (check), and the undervalued "stub"
after accounting for cash and publicly-traded securities (check),
we realized that the MGM situation is remarkably similar to that of
IAC.
Implied MGM
Domestic Value
|
($ in billions,
except per share data)
|
|
|
MGM Share
Price
|
|
|
$19
|
Shares
Outstanding(1)
|
|
|
493
|
Market
Capitalization
|
|
|
$9.4
|
(-) MGP
stake(2)
|
|
|
(4.9)
|
(-) MGM
China stake(2)
|
|
(2.6)
|
(+)
Domestic Net Debt(3)
|
|
1.4
|
(-)
Value of equity investments(4)
|
|
(1.7)
|
Implied Enterprise
Value - MGM Domestic
|
|
$1.5
|
We will be a minority investor in MGM, but given the size of our
financial commitment, we'd welcome the opportunity to contribute to
MGM's success in any number of areas. We think MGM could be
one of the largest direct marketers on the internet as online
gaming grows, and online direct marketing is an area we know
well. We also see transformative opportunities beyond gaming
for theatrical onsite activities, including in the regional
casinos, and we'd bring our relationships and ideas to make that
happen, as well as the potential for expansion into new worlds of
media and wagering with innovative and exclusive content. And
having served nearly 15 million paying subscribers throughout IAC's
businesses last year – and an order of magnitude more customers who
don't yet pay to subscribe to our products but use free or
"freemium" versions of our services – we'd love to help MGM
optimize its "funnel" of M-life loyalty customers and attract new
digital-first audiences. The good news is, from the outside
looking in, it seems clear to us that MGM's leadership sees these
same opportunities, and we will cheer them on as
partners.
Over the next decade, free cash flow at MGM could be in excess
of its current valuation, and we believe the business will have
ample opportunities to invest that capital. If nothing else,
of course, our ownership will steadily accrete up if MGM continues
to use that free cash flow to shrink its capital base. Regardless
of how MGM chooses to put its cash flow to work, the power of that
cash flow doesn't appear to be getting much value in the market,
and we believe that those financial dynamics – on top of all the
other positives – make this investment and its potential return
every bit as worthy as other opportunities we may have to deploy
our capital.
Although we would never "bet the company," we know that this is
a large bet for IAC. We have long been driven to look
opportunistically for chances to build great interactive businesses
and compound capital for our shareholders, and MGM has a rare but
clear opportunity to deliver on that promise. And while we
can't say where our investment goes from here, we do believe this
is the first step in what will hopefully be a very long and
productive relationship. We begin in total alignment with MGM
shareholders, management, and the board and we intend to assist and
support them in all their ambitions.
Sincerely,
Barry Diller & Joey Levin
1 Shares outstanding per Q2 2020
10-Q
2 Reflects MGM's 56%
ownership of MGM China at $1.24 per
share and 57% ownership of MGM Growth Properties at $28.22 per share as of 8/7/20
3Net debt for
MGM Domestic as of Q2 2020 10-Q excludes debt of subsidiaries (MGM
China and MGM Growth Properties); includes $163 million secured note receivable from sale of
Circus Circus on 12/20/19 and
redeemable non-controlling interest of $59
million for non-controlling parties in MGM National Harbor
redeemable beginning 12/31/19
4 Equity
investments represents ownership in CityCenter based on research
average of $1.5 billion; includes
other equity affiliates at $226
million book value and excludes MGP equity investment in MGP
BREIT Venture of $806 million as it
is held at MGP subsidiary and counted in MGP's equity market
capitalization
IAC disclosed its share acquisition on Schedule 13D filed today
with the Securities and Exchange Commission. IAC is actively
engaged with gaming regulators in the jurisdictions in which MGM
Resorts operates to obtain necessary licenses.
About IAC
IAC (NASDAQ: IAC) builds companies. We are
guided by curiosity, a questioning of the status quo, and a desire
to invent or acquire new products and brands. From the single seed
that started as IAC over two decades ago have emerged 10 public
companies and generations of exceptional leaders. We will always
evolve, but our basic principles of financially-disciplined
opportunism will never change. IAC today operates Vimeo, Dotdash
and Care.com, among many others, and has majority ownership of ANGI
Homeservices, which includes HomeAdvisor, Angie's List and Handy.
The Company is headquartered in New York
City and has business operations and satellite offices
worldwide.
Cautionary Statement Regarding Forward-Looking
Information
Certain statements and information in this communication may be
deemed to be "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995.
Forward-looking statements may include, but are not limited to,
statements relating to IAC's and MGM's anticipated financial
performance, objectives, plans and strategies, and all statements
(other than statements of historical facts) that address
activities, events or developments that IAC and MGM intend, expect,
project, believe or anticipate will or may occur in the future.
These statements are often characterized by terminology such as
"believe," "hope," "may," "anticipate," "should," "intend," "plan,"
"will," "expect," "estimate," "project," "positioned," "strategy"
and similar expressions, and are based on assumptions and
assessments made by IAC's and MGM's management in light of their
experience and their perception of historical trends, current
conditions, expected future developments, and other factors they
believe to be appropriate. IAC and MGM undertake no duty to update
or revise any such statements, whether as a result of new
information, future events or otherwise. Forward-looking statements
are not guarantees of future performance. Whether actual results
will conform to expectations and predictions is subject to known
and unknown risks and uncertainties, including: risks and
uncertainties discussed in reports that IAC and MGM have filed with
the SEC and other circumstances beyond IAC's and MGM's control. You
should not place undue reliance on these forward-looking
statements. For more details on factors that could affect these
expectations, please see IAC's and MGM's filings with the SEC.
Contact Us
IAC Investor Relations
Mark
Schneider
(212) 314-7400
IAC Corporate Communications
Valerie Combs
(212) 314-7361
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SOURCE IAC