In our last blog post on MGM Resorts (MGM), we note that after a string of tough quarters brought about mostly due to things beyond MGM’s control, the story was moving in the right direction.  Bad luck has struck again and not just with hold in the casinos.  The coronavirus has shut down Macau and led to another leg down in the baccarat business on the Las Vegas Strip where MGM dominates.  The company was forced to pull their 2020 guidance which while explainable is still a disappointment given challenges the company has had forecasting its business over the past few years.  We have been very pleased with the company’s moves to sell assets, initial steps to simplify the corporate structure, and return of capital via buybacks and dividends.  Along with the 4Q19 report, the dividend was raised, a large new buyback authorization was put in place, and a Dutch auction tender for shares is underway to accelerate use of the new authorization.

While we are happy with the capital allocation and corporate restructuring, we are less positive on MGM exiting the latest report.  First, it appears the company lost market share and fell short of EBITDA targets in its Strip assets.  This is troubling given that margins should have been supported by the company’s 2020 profit improvement plans, which management says are going very well.  Second, and possibly related, the company’s long-time CEO, Jim Murren, unexpectedly announced he was stepping aside.  We have not been fans of Murren and the company has been the target of activist investors.  It may a good thing for him to move on.  The timing seems odd, however, as (1) the company remains in the middle of a major restructuring of its asset base, (2) is in the final year of its latest profit improvement plan, (3) is undergoing a major expansion in sports betting, and (4) faces a critical year in its bid to build a new integrated in Osaka, Japan.  The timing of Murren’s departure could be the sign of a deeper problem.  Or maybe not and it just makes sense to leave now with the biggest parts of corporate restructuring and asset sales complete and Japan needing clarity on long-term leadership.

In the near-term, MGM is offering to repurchase about 7% of its outstanding stock at a price between $29 and $34 in mid-March.  We suspect the price will be in top half of the range putting downside support in place for the shares.  We are revaluating our view on MGM and will use the Dutch auction period to decide if there is still sufficient upside to justify continuing to hold the shares.  It is worth noting that in our last post on MGM we mentioned a mid-$30s target, not that far above today’s levels.

MGM is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  MGM is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.