A few months ago, MGT Capital sued MGM Resorts and four other gaming companies–Caesars Entertainment Corp (NASDAQ:CZR), WMS Industries Inc. (NYSE:WMS), Penn National Gaming, and Aruze Gaming America–for violating MGT’s patent. The plaintiff is now looking for a slice of the revenues generated from each linked slot machine. According to a Forbes article that is bullish on MGT, there are “a minimum of 3,000 and perhaps 10,000, and growing” slot machines that potentially violate the patent. Each “linked” slot machine generates around $3,000 in sales per day. This translates to royalties of between $33 million and $100 million based on a 1% royalty fee. With Nixon & Vanderhye, a Tier 1 firm in patent law and IP litigation, representing MGT, I am confident the company will come away victorious. By broadening the infringement claim to casino operators, MGT is also placing pressure squarely on MGM’s management–something it definitely doesn’t need right now amidst all its troubles.
Accordingly, MGM may very well decide that the best path forward is to simply acquire MGT Capital. Such a decision would not be without precedence. In 1999, Acres Gaming filed a patent lawsuit against Anchor Gaming, and IGT then acquired the latter and used its resources to buy out the plaintiff at a 50% premium to the prevailing price. Interestingly, one of the defendants in the MGT Capital suit, WMS Industries, was recently bought out by Scientific Games Corp (NASDAQ:SGMS) at a 50% premium. As a global supplier of gaming products to casinos, Scientific Games is not very desirous to have its market under attack from a lawsuit. And since WMS shareholders are getting a nice premium for the transaction, they will feel the pressure to settle sooner rather than later. It should not be surprising then that that WMS characterized the transaction as an “opportunity of a lifetime.” Ceasers, meanwhile, is on track to lose $1 billion and has a considerable debt load of almost $20 billion. It doesn’t need this lawsuit on its plate right now.
Ditto for MGM, which, again, has net debt at nearly 2x the market cap and hundreds of millions in dollars piling up as losses. If the other defendants begin to settle, it won’t be long until MGT Capital calls MGM’s bluff. It already is a bit panicky about its own finances and–along with Caesers and WMS, in particular–doesn’t need any extra pressure. Right now, the best way that MGM can create value for its shareholders is through mitigating risks, cleaning the balance sheet, negotiating with Chinese regulators, and settling with MGT.
Conclusion
The casino issues faces several key issues ranging from increased Chinese regulation over gambling practices to balance sheet woes and lawsuits that tangle up management’s time. Decelerating growth in Macau isn’t one of them. For this reason, I recommend going long LVS despite its high multiples. MGM is more speculative; but, if it takes the steps that I mentioned above, it can start to build on its already strong free cash flow base. Meanwhile, LVS is still on track to realize more of the benefits arising from better-than-expected Macau growth.
The article Why LVS Is Positioned to Rise Over This Stock originally appeared on Fool.com and is written by David Gould.
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