Back in October, 26 Capital Acquisition Corp. (NASDAQ: ADER), a SPAC founded by gaming turnaround specialist Jason Ader, announced a business combination with Universal Entertainment Resorts International (UERI), the holding company of Okada Manila International. The merger agreement was recently extended from July 1 until Oct. 1, an indication the two parties remain committed to closing the deal. Ader said his team is “working around the clock to ensure we get it across the finish line.”
Some industry observers believe the proposed tie-up is the latest example of a blank-check company grabbing at whatever it can in the face of strong market headwinds. SPACs have a two-year window to consummate a business combination. Failure to do so results in the SPAC’s sponsors losing 100% of their investment.
But Brendan Bussmann (managing partner, B Global) sees the announced merger, which would create the biggest Philippine public company ever to be listed on a major U.S. exchange, as a means to an end—a downstate New York casino license for 26 Capital. UERI gives the SPAC a dance partner with experience, a characteristic regulators desire in prospective licensees, at a time when most established brick-and-mortar players are already tied to other groups. The international operator also brings a new brand and a “different voice than the players with a home-field advantage,” which Bussmann said could potentially be seen as a differentiator in a competitive process.
JWS’ Take: Okada Manila is the Philippines’ largest integrated resort. Its 34,950 square-foot gaming floor is among the biggest in the world. The Las Vegas-style hotel and casino is located in Entertainment City, a district that generates gross gaming revenues on par with Sin City.
Manila is an attractive gaming market for two reasons. “It’s among the leading markets in Asia, and [it] has continued growth [prospects],” Bussmann said. Gamblers in the Far East are increasingly looking for gaming destinations outside of Macau as China cracks down on the industry.
But Bussman suspects 26 Capital’s interest in UERI, which includes Okada Manila as well as a gaming supply business (think: arcade-style slot games Pachinko and Pachislot), is less about the Philippines and more about New York City. “There are very few opportunities that come along in gaming that allow [an operator] to create an integrated resort in a large population base that offers sound regulation,” Bussmann said. UERI is among the 31 entities to have submitted a preliminary LOI.
New York plans to award just three downstate casino licenses, and UERI may appear to be a long shot. But Bussmann explained that many groups who submitted a request for information will not end up submitting a bid when the request for application finally arrives. There are probably closer to a half dozen operators (including Bally’s, Las Vegas Sands and Hard Rock International) willing and able to put up the half-billion-dollar buy-in for a license and then spend billions more to build a world class resort in or around NYC.
If UERI is awarded a downstate New York casino license, Bussmann said he would be bullish on the company’s long-term future. “Whoever gets New York is going to be at an advantage, because [they would be] in a major metropolitan, world-class city. Being on the world scale elevates your brand considerably.”
He compares the situation to the recipients of the concessions in Macau (see: Las Vegas Sands, Wynn, MGM, SJM Holdings, Galaxy and Melco) the two licensees in Singapore (see: Las Vegas Sands and Genting).
That does not mean UERI’s future is in doubt should it miss out on New York. The Entertainment City resort was profitable pre-COVID (see: $137 million in adjusted EBITDA in 2019), and that was with the facility operating at less than 60% capacity. Bettors have started to return after two plus years of lockdown (the Philippine Amusement and Gaming Corp., or PAGCOR, reports the country’s gaming revenue grew 30.3% YoY in Q1), and Bussmann said Okada Manila is “headed back towards profitability.”
Okada Manila’s valuation also “represents a discount for investors [with] casino construction costs rising,” Ader said. “It has an acquisition enterprise value of $2.6 billion, but would cost around $4 billion to construct today.”
Considering the market for SPAC IPOs, there is certainly reason to doubt 26 Capital can get the deal across the finish line. An ongoing power struggle over control of Okada Manilla is also a threat to torpedo the business combination. For those not familiar, the resort’s current management team is accused of staging a hostile takeover of the property in late May. The ousted board—which agreed to the deal with 26 Capital—has since filed criminal complaints against 79-year-old Japanese billionaire Kazuo Okada and several others within his organization. Okada’s group denies the allegations, citing a Supreme Court Status Quo Ante Order ordering restoration of the 2017 board. Okada was removed from the board four years ago after being accused by his estranged wife, kids and business partners of financial improprieties.
A resolution of the dispute will likely need to occur before New York regulators can get comfortable with the idea of UERI as a license holder. Okada Manila bank accounts are currently frozen as a result of the SQAO.
The business combination, which will provide Okada Manila with up to $275 million in cash, thus the enterprise valuation of $2.6 billion—less than the $3.3 billion replacement cost associated with the integrated resort. (Ader believes it would cost closer to $4 billion to build today with construction costs rising.)
The 26 Capital CEO called $2.6 billion a “very attractive valuation.” He said, “Okada Manila is expected to have tremendous future growth by tapping into significant pent-up demand after the easing of travel and hospitality restrictions. This transaction allows the company to expand in the Philippines and look outside its current market to other growth markets.”
But Bussmann was not prepared to call the combined company intrinsically undervalued. He said it really depends on if/when the Philippine market fully bounces back post-COVID. “One of the biggest [liabilities] in that region is the reliance on [China]. One of [Okada Manila’s] biggest customer bases is the Chinese; that customer base has not returned yet, and I don’t know when that customer base will return, because as we’ve seen in Macau over the last three to four weeks, it only takes one (COVID) case that shuts down the whole thing [again].”
It is also not clear how the ongoing family power struggle over Okada Manila will impact the business and its potential opportunities. “That is still a fluid situation [in part] because it means working with PAGCOR, which may or may not [experience] some changes now that a new president has been elected in the Philippines,” Bussmann said.