A Wall Street analyst said MGM Resorts International’s focus should shift to growth projects elsewhere after it withdrew its application for a downstate New York casino license.
On Tuesday, MGM withdrew its commercial casino license application, calling off its Yonkers expansion project at the Empire City Casino. The company stated that the return expectations for its $2.3 billion proposal have altered since submitting its application in June.
David Katz with Jefferies called MGM’s decision “surprising.” He said it was likely in response to the high tax rate, presence of other final bidders in the vicinity, and the shortened license term.
“In this context, we appreciate management’s capital prudence and view the news as neutral for the shares,” Katz said. “We also focus on what’s next for MGM, in that avenues of growth are more positive than capital returns, in our view.”
MGM reaffirmed its commitment to operating Empire City in its current format, offering slot machines and horse racing. Katz said MGM’s location, in southern Westchester County near the New York city line, is superior to most of the others, given its highway access and convenience to appropriate customers.
“Nonetheless, MGM ultimately made a disciplined choice,” Katz said. “Growth projects elsewhere are critical for the shares to perform, rather than increased capital returns.”
MGM has a $12.5 billion casino project underway in Osaka, Japan, that will open in 2030. It’s building a non-gaming hotel project in Dubai; a platform is being built to accommodate a casino if gaming is expanded to that Emirate.
The main issue specific to New York was that the four proposals that reached state review — Bally’s, Hard Rock, MGM, and Resorts World — are bunched together in a small geographic area. In addition, the Empire City renovation was predicated on receiving a 30-year license versus the current expectation of a 15-year license, Katz said.
“The reduction in the license term to 15 years dramatically alters the underwriting of what had already been expected to be a speculative process based on the tax-rate bidding aspect,” “Katz said. “The advancement of Bally’s proposal in the South Bronx could have an impact on MGM’s opportunity in the northern Bronx.”
Barry Jonas of Truist Securities in a note to investors called MGM’s withdrawal the end of “a frustrating and lengthy chapter” in the downstate New York casino licensing process, the end result of a frustrating project timeline, including multiple lengthy delays, changing project economics and an altered competitive environment.
“We actually saw the risk of a winner’s curse here and see this as a positive for MGM who now frees up capital for potentially better uses,” Jonas said.
“We had heard some concerns around the MGM project on the scale of incremental taxes and potential ROI,” Jonas said. “We note MGM’s supplemental application was due October 15, which would include tax rate proposals and other terms, after which exiting the project might have been even more difficult. The $2.3 billion price tag, including a $500 million cash license fee payment, no longer made sense, with MGM now planning to reallocate spend to alternative opportunities potentially, including more attractive return profiles.”
Current remaining bids for up to three potentially awarded downstate licenses now include the $5.5 billion Resorts World project; Steve Cohen’s $8 billion Citi Field project in partnership with Hard Rock; and Bally’s $4 billion Bally’s Bronx project at the Bally’s Golf Links, formerly Trump Golf Links in the Bronx.
“At this point, we could see all three bidders or two or one or even none awarded a license,” Jonas said. “For hold-rated Bally’s, investor concerns exist over the company’s debt profile, existing commitments in Chicago and Las Vegas (not to mention Australia), and if the Trump relationship (the Trump Organization could receive $115 million if the site is chosen) helps or hurts the potential bid. We note Buy-rated GLPI would have a right of first refusal on a Bally’s New York project, though we think there could be multiple interested parties for financing.”
Jonas said another important factor to consider is whether the state legalizes igaming and if MGM’s exit has any impact on the process and expected timing. He doesn’t think the risk of igaming weighed heavily in MGM’s exit.
“Nevertheless, budgetary needs for the state remain,” Jonas said. “We’ll wait and see which land-based bids are accepted, but New York remains on many participants’ short list of those to watch for future igaming legalization.”
