SOTP Methodology

Does it work? Can $MGM Re-Rate Ahead?

I have been doing this public market investing thing for a long, long time, almost 30 years. SOTP (sum of the parts) analysis is always quite enticing, especially when the conclusion is “you are getting the core business for free”. However, in order for the market to recognize the value usually requires some sort of “break-up” or transaction to unlock the value. Or, the public company can take matters into their own hands buying back stock or monetizing the assets via assets sales. MGM is one such company which checks all the boxes for SOTP and is aggressively buying back stock the past 18 months (484m shares out in 9/2021 to 365m in 6/2023)

What are the parts? MGM is rooted in its Las Vegas casinos but has many regional casinos in the U.S., MGM Macau in China, Bet MGM (a partnership with Entain) as well as a project in Japan (the first of its kind, MGM Osaka) and possible NYC project to be approved in 2024. The balance sheet can look confusing at first glance with consolidated debt at $31.9 billion and cash of $3.8 billion. However, MGM made the decision in 2021 to go “asset light” by selling its facilities to REIT VICI Properties and paying annual rent of around $2 billion. So, $25 billion of the debt shown on the balance sheet is capitalized leases which you need to subtract in order to calculated traditional debt and leverage. In essence, the annual $2 billion rent paid to run the businesses negates the debt that is capitalized as the company will pay rent in perpetuity.

Part 1: MGM Macau

This is the easiest to calculate as MGM China is publicly traded and MGM owns 56% of the company which at Friday’s closing price would be worth approximately $2.6 billion. This asset is back to producing revenues and EBITDA equal to or greater than 2019 levels and they were able to renew their lease with the Chinese government for an additional 10 years with the only player being allowed to add 200 more tables.