Wynn: Tilman Fertitta purchase changes the game (NASDAQ:WYNN)

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As we have long guided you in SA, we believe that the shares of Wynn Resorts Ltd. (NASDAQ: WYNN) have been grossly undervalued, just waiting for someone to discover that fact and act. The low valuation was, of course, a consequence of the disastrous zero China’s covid policies that have kept the recovery in Macau in check for nearly two years. It also grew out of the consensus of analyst reports that continued to use the same pre-Covid data points to price stocks.

That was understandable, but in the end, wrong. We’ve been living in a all bets are out of the world in the sector for almost three years. Even before the pandemic, Wynn stock lost much of its appeal to longtime stock fans when, in 2018, founder Steve Wynn was ousted due to allegations of sexual misconduct.

Since then, successor management, faced with a series of crises, made an effort to “un-Steve” the company. It quickly resolved core issues. Macau’s ongoing lawsuit settled. Wynn’s name was removed from the Boston property. Beyond that, we had management, not the normal, bold, often brilliant strokes of imagination that investors have come to expect from the eponymous founder. But clearly an ingredient has been missing here.

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This also produced a late but essentially unconvincing entry into sports betting with WynnBet, still sitting on the lot, as a used car. To be fair, the late start was partly due to Steve Wynn’s early misgivings about online sports betting. However, it was also clear that had Wynn been at the helm, the entry, albeit late, might well have come with a better chance of gaining solid market share than as a fringe third-tier player.

The powerful rally in Las Vegas, continuing for its 19th consecutive time, was one of the bright spots for the stock in terms of giving investors a glimmer of hope that the company could weather the worst in Macau. Overall though, the stock was hit along with its peers in Asia to the extent that its Las Vegas numbers only produced meh shrugs as to the indicated stock price.

Mr. Market has also been concerned about potential liquidity problems due to his $12bn long-term debt and ongoing losses in Macau that are reducing his reserves. However, the company now has $2 billion in cash (mrq) with a current ratio of 1.47, two indicators of reasonable liquidity. The company does not have a liquidity threat for at least a year, assuming no change in China policy.

But in the longer term, it would face the refinancing of maturities at a much higher price of money. That implies, at least on the surface, that it won’t be in a position to start reducing debt until Macau starts shooting up again. But for now, it shouldn’t be a factor in stock valuations. In addition, Wynn has assets that are easily salable if the time comes. Among them his successful Boston Encore property. Its construction cost 2,600 million dollars. It could go into a REIT sale, or a buyout, which could generate income that could be applied to much of the debt settlement.

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Then there’s the possibility of selling the Macau and Boston properties to massively reduce debt and expand in Las Vegas, where Fertitta apparently strongly believes in a future there. (She has applied to build a mega-property on the strip.)

Now comes the billionaire Tilman Fertitta, who buys 6.1% of the shares that he, as a visionary and visceral trader, has seen to be highly undervalued, he made his move. The fact that Wynn remains jailed with his peers in Macau did not stop what he clearly sees as Wynn’s simple math that showed $58 a share as real value, without Macau. And he acted, his move rocketing the stock now inching closer to $70.

Bottom: Tilman has shown great love during the pandemic by taking refuge in the NBA team and restaurants, but his net worth has risen to close to $5 billion.

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At the same time, it appears that Beijing may well be in the early stages of a steady reopening of the country, province by province, to the eVisa scheme and group travel. That news comes as a bonus. In a few weeks, the four original open provinces will once again accept arrivals to Macau.

That will result in a significant increase in average daily steps from a meager 20,000 to possibly double according to our sources there. The news flow from Macau could start to look more positive. And that would quickly appear in Wynn’s trading range. But we think the hard truth of what possibly motivated Fertitta is an opportunity to take over the company with a market cap of $7.7 billion, well below its value, even if you count the replacement value of its assets. properties in Las Vegas and Macau.

The Big Three: Ready to Move In

The purchase of 6.1% of Fertitta, added to the 8.9% held by Steve Wynn’s ex-Elaine, plus the 4.9% held by Asian gaming giant Galaxy Entertainment Group (HK007) brings their combined stake to ~20%. So the next question is: Can Tilman buy Elaine’s shares at a reasonable premium? We think he can. If nothing else, Elaine Wynn has thought of herself as much more than the boss’s wife for decades while she was still married to Steve. Over time, her voice in her management became much stronger and she was heard, as she clearly participated in the growth of the company. It’s quite possible that she would turn down an offer, but at the same time she would want to stay involved and happily add her stock to Tilman’s to build a position that sparks the acquisition.

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Above: Golden Nugget by AC de Tilman. managing to maintain participation in a difficult market.

As for Galaxy: They bought right after Steve left with an average of $180. It was a strategic entry for a company flush with cash (and still) due to a belief in Macau’s future before the pandemic. Any reasonable offer that can reduce your presumed loss would seem attractive. But just like Elaine, they might decide to join Fertitta in creating the 20% triumvirate as a starting point. After that, a phone call to Uncle Carl Icahn, for example, would make a lot of sense to him. Historically, he’s made so much money on gaming deals, it’s hard to see why he wouldn’t find himself joining in the fun with a big purchase as well.

Is Wynn in play?

The playing field is now wide open. Sitting now on the sidelines are the likes of Las Vegas Sands (LVS) with a ton of cash. Many Las Vegas pundits served decades running the Venetian and a real contender that could field an activist like Icahn to outdo many suitors. Wynn is hot merchandise right now in our opinion. It is undervalued, its products are blue chip, and its prospects for some relief in Asia are getting stronger. It is also a clear target for companies such as VICI Properties (VICI) or Gaming and Leisure (GLPI) to acquire the real estate, thus providing a large amount of cash for Fertitta and/or a group of cohorts.

Whether the company is on the line or whether Tilman moves quickly to consolidate and grow his position by buying more shares or teaming up with big shareholders is less important than the ultimate test of where the shares are and where they could be. That would happen if we do see a bidding war, or if Tilman moves quickly to accumulate and consolidate in hopes of avoiding a war.

A look at the valuation

We have long expressed our opinion that Wynn stock has been woefully undervalued. But we also recognized the negative news flow from Asia as the main culprit for Mr. Market. So we did our own math and came up with a number that turned out to be close to the estimates we found in alphaspread. Despite the bad earnings news, heavy debt and general chaos in Asia, they applied a valuation using three different criteria. Formulas, like all constructions of this type these days, have their pluses and minuses, too long to reflect on in this limited space. However, we found that across all three builds, alphaspread posted much higher valuations than what the stock was trading at the time.

Intrinsic Value: $95.56

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Discounted Cash Flow Value: $68.14. By this measure, the current spike has brought the stock to full value.

Relative Value: $122.97

Current Analyst PT: $83.73

Our PT: $97.50 assuming the Macau news flow starts to look like the gradual opening of more provinces continues.

The management bonus

As readers of this space know, I come to my guide on gaming stocks from a management perspective. Having been inside the C-suite for decades, I think I understand how to assess management in terms of the policies and operational skill sets that I see seeping into your results. Some operators are simply better at running casinos than others. While they all use comprehensive analytics as the building blocks of decision making, there are some that are better than others at acting on their analytics through a good deal of operational insight. And yet, there are still others who bring the ever-unique instincts of the entrepreneur to drive superior performance home.

In the case of Wynn, as I noted, we’ve had a number of post-Steve managements who have provided stewardship through many difficult times. However, most people, while efficient and responsible, have not exhibited the kind of creative drive for which that company has been individually noted over the decades under founder Wynn. But he’s gone and we can’t have the navel of management forever contemplating on “What would Steve do?” or “what wouldn’t Steve do?” or “who cares what Steve would do these days?”

Inside, we now have the potential prospect of an emerging situation that could land Tilman Fertitta as president. He is a cat of a different stripe than the ones currently inhabiting Wynn’s C-suite. When he took a stand in 2021 selling his Golden Nugget online site for $1.56 billion and also vowing not to ditch DKNG stock, it seemed to me like an adult had walked into the room to cut back on some of the dumbest marketing moves of The management.

But if Wynn is indeed in the crosshairs and becomes a holding company for Tilman, his influence at the board level would be a huge asset to the company. He is a highly independent thinker of ideas who knows how to move the pieces around the corporate chessboard to result in a checkmate victory for himself and his associates.

He, for now, believes one can still be a Wynn buyer, as he is in the early stages of a career based on the Fertitta move.

If you hold, it makes sense to accumulate and average price. If it’s not in stock between now, say $75, it has BUY written all over it. If we are wrong and stocks settle not far above where they are now, the downside risk we see is small relative to a rally, which alone may trigger further gains, if China seems to start to open up.

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