Encore Boston Harbor sale to MGM a long shot, analysts say

Wynn Resorts Ltd. could be trying to shake off a baby sitter situation through the sale of Encore Boston Harbor, analysts say.

Wynn Resorts and MGM acknowledged in a joint statement Friday that the two companies have had preliminary talks about a possible sale of the yet-to-open, $2.6 billion, 671-room hotel-casino.

The possibility of Wynn Resorts selling Encore Boston Harbor is “head-scratching,” said Barry Jonas, an analyst with Atlanta-based SunTrust Robinson Humphrey Inc.

The company has spent about three years building the property, and spent the last 16 months trying to ensure its success after accusations of sexual misconduct by its former chairman and CEO, Steve Wynn sparked multiple investigations, jeopardizing the company’s Massachusetts gaming license. Steve Wynn has denied all accusations of harassment.

The company received the green light to keep its gaming license and to operate Encore Boston Harbor last month, but with several caveats — one of which being the appointment of a monitor by the Massachusetts Gaming Commission to oversee Wynn Resorts’ operations of the property for three years at the company’s expense.

“There’s no regulatory reason they’d have to sell,” Jonas said. “There’s this baby-sitter-type mentality with an unclear supervisory situation for a few years, that’s one possible reason why they’re exploring monetizing this.

David Katz, an equity analyst with the New York-based Jefferies Group, said this is “new territory” for the company.

“I’ve covered Wynn a very long time and they’ve never been a buyer of other properties or a seller of their own,” he told the Review-Journal.

Resort sales price

Jonas speculated that if a transaction occurs — a big if — the resort would sell for at least $2.6 billion and possibly as high as $3.5 billion, even though the property has no track record of financial results.

“Most of the investors we’ve spoke with are skeptical a transaction makes sense from a structural perspective,” Jonas said. “From a strategic perspective, you can argue MGM has been focused on best-in-class regional properties and Boston would fit in there. For Wynn, you can argue that ultimately their model is more high-end VIP in Las Vegas and Asia.”

Representatives of Wynn and MGM had no comment Monday on the analysts’ speculation.

Friday’s joint statement from the two companies did not address a prospective price of the transaction or how MGM would pay for any deal. MGM is in the midst of a cost and expense reduction strategy it calls MGM 2020 to improve cash flow by $300 million a year by 2021, resulting in the layoff of dozens of employees.

But Katz said it would be possible for MGM to finance the purchase if it completed the sale with its real estate investment trust, MGM Growth Properties.

The purchase would allow MGM to operate the hotel-casino while MGP would own the real estate, protecting MGM from taking on more debt.

“The resulting deconsolidation should be beneficial for MGM’s valuation, as we have indicated the consolidation of MGP into MGM has served thus far to trap value rather than capture it.” Katz said in a note.

Katz said a transaction between Wynn and MGM could be a negative to both companies’ stock prices. But he added that it’s difficult to reach any conclusions without knowing the terms of a deal.

“We consider the prospective sale of Encore Boston Harbor by Wynn to MGM as a modest negative for both stocks,” Katz said in a note to investors Monday. “While the numbers could work based on terms, we believe it could be strategically net negative and success would ultimately be determined by the market valuations.”

Additional obstacles

Even if the two companies came to an agreement, it’s possible a deal could be blocked by state regulations and host-community agreements Wynn has reached with the city of Everett and MGM with the city of Springfield, in western Massachusetts.

The state’s gaming laws prohibit a company from owning more than one casino resort in the state, so MGM would have to sell its MGM Springfield property that it opened in August in order to take over Encore Boston Harbor.

In addition, the companies would have to work through their respective host-community agreements to make a transaction work.

Everett City Councilor Michael J. McLaughlin, whose political jurisdiction includes the acreage where Encore Boston Harbor sits, told the Review-Journal Monday it’s still too early to make a determination on whether Everett would support a transaction.

A supporter of Wynn Resorts’ Boston Harbor plans since its host-community agreement was signed in 2013, McLaughlin said there are “too many moving parts” to determine yet if there would be support for MGM ownership.

Contact Richard N. Velotta at rvelotta@reviewjournal.com or 702-477-3893. Follow @RickVelotta on Twitter. Contact Bailey Schulz at bschulz@reviewjournal.com or 702-383-0233. Follow @bailey_schulz on Twitter.