Ho gets SJM to the table

Euromoney magazine, August 2008

It’s tough to imagine a worse environment for an IPO than the one that faced Sociedade de Jogos de Macau, the casino business owned by Asia’s most legendary gambling tycoon Stanley Ho, when it listed on July 16.

There’s the hellish global market conditions, for a start: the Dow hit its lowest level for two years the night before SJM started trading in Hong Kong, and the Hang Seng has been hovering around similar lows. Very few issuers have braved these markets with an IPO and those who have attempted it have looked either brazen or desperate, and usually both.

But SJM faced a host of localised problems too. On the day of launch, Macau announced a series of restrictions on mainland visitors to Macau, the latest in a number of measures designed to cool the growth of Macau’s gaming industry and, in particular, curb the enthusiasm of mainlanders in helping it grow. The maximum length of time Chinese can stay in Macau en route to other places, and the frequency of their visits, have been cut by China.

The Chinese are the lifeblood of Macau. It’s hoped that the enclave will attract gamers from all over the world – hence the increasing appearance of the Las Vegas model of casinos, combining entertainment and retailing with the gambling tables – but the truth is Chinese patrons are the main prize, and they can gamble nowhere else in their own country. These measures have slammed gaming stocks (an extreme example, Dore Holdings, which specialises in catering for high rollers, has fallen from HK$3.50 to HK$0.22 in a year).

And then there’s Winnie. She’s the sister of Stanley, and the two are not close – in fact, she has filed more than 30 law suits against him and his companies, on a variety of grounds such as the structure of the companies and the nature of the IPO. The most recent of these was a call for judicial review on the eve of the listing, causing a one week delay to the float, after the books on the issue had been closed.

While the courts took a look, SJM and its lead underwriter, Deutsche Bank, elected to allow retail investors to retract their commitments for a full refund – and more than half of them did, even though a court ruling in the meantime held that the IPO was legitimate and could go ahead.

Although retail only accounted for 15% of the deal, this still meant more than 7% of the deal’s total book walking out the door. (Institutions, having made their decisions based on a more thorough analysis of the company story than the more flip-happy retail investors who dominate Hong Kong, generally stayed in.) Since the books were closed and there was no way to go back and reallocate – and the retail book had barely been covered in the first place – Deutsche had to cover the shortfall, although it did so by means of a series of total return swaps to other investors, meaning that today Deutsche has no effective exposure to the underlying stock.

The deal itself, when it finally came, raised half the figure that was being mooted early in the year, settling for $494 million. It has declined in trading since launch.

Some, though, think it a miracle such a deal ever got done at all. “It’s taken three years, 37 court cases, two attempts at getting a judicial review, two prospectuses plus a supplemental, in the shittiest market the world has seen since the 30s, in the casino business,” says one person close to the deal. “It’s had to get through legal and compliance, at least two regulators, and the Hong Kong exchange. That is a Herculean task, an unbelievable banking challenge.”

The other way of looking at it is to wonder what sort of masochistic zeal possessed the issuer to go ahead with such vast challenges in the first place. Ho needed the money: his eldest casinos, like the  alluringly hideous Lisboa, are hopelessly dated against the new wave of Las Vegas Sands-styled resorts, and need to be upgraded. Ho, who had Macau’s gaming industry to himself for decades, now faces five competing licensees (one of them, Melco, run by his son) and by some estimates now has a gaming market share only in the high teens in percentage terms. To stay in the game, so to speak, he clearly has to spend.

The other underlying reason appears to have been a realisation that to have any kind of clarity as a business, it needed to get all the potential law suits and judicial reviews out of the way. It surprised nobody connected with the deal when the call for judicial review came in at the last possible moment before listing; it had always been a question of when, not if. But now, there is a listed entity with its legitimacy confirmed by some of Hong Kong’s highest courts, and that gives it a much more investor-friendly base to build on.

Still, the sight of Greater China’s more colourful tycoons reaching the public markets has always been profoundly entertaining. One has to enjoy a prospectus with a risk section covering not only building delays, labour shortages and business rivalry, but money laundering, cheating, illegal mainland casinos and the risk that people win too much. It even includes this delightful clause: “STDM [the parent] and Dr Ho have the ability to exercise substantial influence or control over us, which allows them to influence or control our business in ways that might not be in the interests of other shareholders.” Ho is in his late 80s now but his kind will be missed when they’re gone.

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