Genting Malaysia: Related Party Transaction

Yesterday, Genting Malayisa (GENM) has proposed to acquire sister company Genting Singapore’s (GENS) UK casino operations. The entire stake would take RM1.67bn out of GENM RM5.7bn cash pile. Investors and analysts view this development negatively given the high acquisition cost which is not compensated by meaningful earnings accretion. The proposal being a related party transaction (RPT), this would require minority shareholder approval at an EGM.

 

This is NOT the first time…

In November 2008, GENM announced RM248m RPT on the acquisition of Walker Digital Gaming. Hence, the counter lost close to RM2.0bn in market capitalization in just 3 days.

RM248m         RPT = RM2.0bn loss

RM1.67bn       RPT = ???

Genting UK

Despite long established operating track record, it is facing many problems such as:

1. weak and volatile earnings performance
2. hike in gaming duties lately
3. ban on smoking in UK casinos
4. lack of scale to buffer “luck factor” in its VIP market
5. UK’s weak economic condition currently

Analysts view:

The transaction is positive for GENS as it could focus more on Singapore, better on balance sheet, and more room to explore other integrated resorts. Meanwhile, this is definitely negative news for GENM due to paying expensively in order to enter a risky market, with minimal synergy and less efficient use of cash pile. Target price was set at between 2.30 to 2.60.

My view:

GENM should utilized its huge cash pile better, although I know this is very difficult given its largest shareholder – Genting Group. Since pool betting duty has increased from 6% to 8%, would the government increase the casino betting duty next?

Sources: Various