Updated March 3, 2020 - 6:04 am
MGM Resorts International is planning a $1.25 billion share buyback after last week’s sharp dip in the stock market.
The casino operator had originally announced plans to repurchase shares Feb. 13. But the company released a statement Saturday saying it had lowered the price it would offer. This creates an opportunity for MGM to buy more stock than expected and could lead to a favorable return for the casino operator, analysts say.
Gaming companies’ stock took a hit last week as investors grew concerned about the likelihood of the new coronavirus spreading across the United States, potentially posing a risk to travel and tourism.
Deutsche Bank analyst Carlo Santarelli said MGM’s shares had also been weak because of broader market weakness, softer-than-expected earnings in 2019’s fourth quarter and the unexpected announcement that CEO and Chairman Jim Murren will step down.
Santarelli said in a Sunday note that should current earnings forecasts hold, he would expect “a favorable (return on investment) on the repurchase activity.”
In MGM’s original tender offer, it said it intended to repurchase up to $1.25 billion of stock between $29 and $34. Shares closed at $31.80 that day.
By Feb. 27, shares had fallen drastically, closing at $25.52. The company issued a statement the next day saying that its tender offer had been revised to fall between $23.50 and $28.
Saeyoung Chang, chair of finance and a professor at UNLV’s Lee Business School, said companies repurchase shares when they think their stock is undervalued.
“If they feel that the prices (went) down simply because of this short-term event (COVID-19), then definitely they will benefit from stock repurchase,” he said.
Chang said these deals can be appealing to shareholders because the tender offer price is meant to be higher than the market share price.
Shareholders who keep investment in the company can also benefit. Chang said company stock prices usually go up after the tender offering, and the company is able to increase earnings per share by reducing the number of shares outstanding.
John DeCree, an analyst at Union Gaming, which has had a client relationship with MGM, said the company dropped its price after shares of MGM began trading below the initial offering.
“The adjusted price range for the tender reflects the sharp correction in the market over the past week or so,” DeCree said via email. “Depending on the willingness of shareholders to tender here, MGM could potentially repurchase more stock than previously expected under the prior price range.”
Has until March 12 to cancel
MGM has until March 12 to cancel the tender offering.
With the recent volatility of the U.S. stock market, Chang said “anything can happen” before then.
Federal regulatory filings show that a number of MGM executives have sold off stock since the offering was announced. President and COO Bill Hornbuckle, for instance, sold 701 shares for $31.39, more than $22,000 total, on Feb. 21. That same day, CFO Corey Sanders disposed of 626 shares for about $19,650 and Murren sold off 1,522 shares for nearly $47,800.
Representatives of MGM did not respond to a request for comment. On Monday, MGM shares closed up 2 percent to $25.05.