Crown Resorts has sold approximately 20% of its investment in Nasdaq-listed Melco Crown Entertainment back to the company for US$800m (or around AUD$1.07bn).
As we noted when we first upgraded Crown in Betting on Crown – part I on 20 Apr 15 (Buy — $13.15), two concerns weighing on its share price were questions over how the company would fund its significant capital expenditure in coming years, along with the impact of the downturn in Macau.
The selldown reduces the first concern and also helps materially reduce net debt, one reason why the company's share price has increased 5% today. We’d prefer the company keep all of the after-tax proceeds rather than returning a portion to shareholders as it indicated when making the announcement.
Another likely reason for the share price increase is more short-term oriented investors approving the reduction in exposure to Macau (albeit relatively minor given Crown retains a 27% investment in Melco Crown). We can’t help but feel this sale is occurring towards the bottom given recent signs of stablisation in mass-market gaming revenue and the prospects for the former Portuguese colony over the longer term as noted in Crown Resorts: Interim result 2016.
Nevertheless, the 20% reduction in cash flows from Crown's exposure to Macau's potential rebound is essentially offset by the reduction in its net debt. BUY.