MGM Resorts International (MGM)

[eastunder]

December 16, 2014, 7:28 P.M. ET

MGM Settles With Contractor; Price Reaction Overblown, Says Morgan Stanley

http://blogs.barrons.com/asiastocks/2014/12/16/mgm-settles-with-contractor-price-reaction-overblown-says-morgan-stanley/?mod=yahoobarrons&ru=yahoo

By Shuli Ren

MGM Resorts (MGM) said it reached a settlement agreement in a long-running legal dispute with contractor Perini Building. The Wall Street Journal‘s Tess Stynes gave us the background:


MGM Mirage and Dubai World are co-owners of CityCenter, which opened as the country’s most expensive private building project at the end of 2009, and includes multiple condo and hotel towers as well as a casino and a mall. But the development opened with the Harmon as an empty shell after construction was beset with problems, including the deaths of six construction workers and financial losses. In August 2011, MGM and Dubai World said they wanted to demolish Harmon, a process that began earlier this year.

The venture partners alleged that Perini owed CityCenter hundreds of millions of dollars because of construction defects. Their engineers said it could collapse in a serious earthquake. For its part, Perini had filed millions of liens against the project.

In a regulatory filing, MGM said CityCenter will receive roughly $195 million related to its Harmon construction defect claims, including the pending settlement and previous insurance-related settlements of about $85 million.

Shares of MGM fell 4.9% upon the news. Competitors Las Vegas Sands (LVS) and Wynn Resorts (WYNN) were down 3.9% and 3.2%.

Investors read too much into this settlement, according to Morgan Stanley‘s Thomas Allen and Mark Savino:


[Today's settlement] should not be viewed as a major incremental negative for the stock. MGM had already accrued a $152m liability (in line with the $153m being paid to Perini), and the total MGM cash outflow of $101m is offset by $97.5m of CityCenter proceeds (50% ownership of CityCenter and $195m cash inflow there) and is <$0.01 / share drag. While LVS, MGM, and WYNN also continue to be plagued by negative news flow around Macau and the China anti-corruption crackdown (with today’s news focused on illicit money transfers), we do not believe MGM’s stock should trade off more than others given its relatively lower exposure to Macau.

Market sentiments towards Macau stocks are weak. The most recent data from Macau is pointing towards a 30% gross gaming revenue decline in December