Wynn Resorts: An Even Money Bet

On Tuesday, February 6, 2018, Steve Wynn resigned as Chairman and Chief Executive Officer of Wynn Resorts amid allegations of sexual harassment of employees and payments of hush money that were inappropriately concealed from the public company’s shareholders.  The allegations came to light as a result of a Wall St. Journal expose in January.

The importance of the nature of the allegations is self-evident.  They are serious enough that Wall St. commentators have expressed concern that, pending resolution, they are problematic with respect to government authorized gambling licenses and the ability of institutional investors to own securities issued by Wynn Resorts.

As to the long-term future of the company, the downside of the situation is reflected by a headline on CNBC attributed to Jim Cramer, “You Don’t Want to Own Wynn Resorts Without Steve Wynn.”

This is certainly an understandable point of view.  Wynn Resorts enjoys a premium valuation with respect to other casino companies because under Steve Wynn’s leadership it has earned a reputation as a very well-run, upscale resort company that has consistently delivered high marks for customer satisfaction and loyalty.

In addition, this reputation for business excellence enabled Wynn Resorts to secure one of only six coveted gaming licenses in the lucrative Macau, China market, which now generates over 70% of the company’s earnings.  Wynn Resorts is also opening additional upscale resort properties in the very competitive markets of Boston, Japan and its home turf of Nevada.

Indeed, it is hard to over-estimate the importance of Steve Wynn to the city of Las Vegas and the gaming industry in general.  Along with Howard Hughes and Kirk Kerkorian, Wynn was one of three true visionaries that helped to make Las Vegas what it is today.

And Wynn, unlike the reclusive Hughes and publicity shy Kerkorian, enjoyed the spotlight.  In the process of making himself an international celebrity, Wynn was a powerful and effective marketer for the gaming industry, appearing in his own television commercials with Frank Sinatra and other luminaries.

For better or worse, Wynn’s charming public persona (false as it may actually have been) has for decades been the best-known face of the gaming industry and has helped make casino gambling acceptable to the American public to the point that 41 states now allow some sort of casino gambling.

That being said, the company’s stock, which had been declining as the allegations unfolded, jumped on the news of Mr. Wynn’s resignation, closing at $173.32, up $14.10 from its close of $163.22 on Tuesday.

The quick recovery in the stock price following its recent plunge reflects the complicated dynamics and uncertainty of this situation.  Some of the positive aspects of Mr. Wynn’s resignation with respect to the price of Wynn Resort’s stock are as follows.

First, the uncertainty with respect to Mr. Wynn is removed.  He is no longer Chairman and CEO.  The company appears to be acting in a manner that will satisfy regulators such that its gaming licenses will not be jeopardized and that institutional investors will not be dumping the stock en masse due to ethical considerations.

Second, Wynn Resorts is a large international company that is obviously managed by more than one 76-year-old man and Mr. Wynn’s ouster has forced a vote of confidence on the overall management team.  The Wall St. analysts who follow the company appear to be voting (in a landslide) with their wallets that they are comfortable with its management as operators of upscale casino resorts – albeit there may be further repercussions with respect to how Mr. Wynn’s behavior may have been covered-up.

Third, the near-term growth strategy of the company is relatively set in that it is has broken ground on new properties in Boston, Nevada, China and Japan.  Vision is not so much needed at this point as execution.

Fourth, and most importantly, the removal of Mr. Wynn as Chairman and CEO puts the company very much in play with respect to a change in control.  Mr. Wynn owns over 11% of the company’s shares, while his ex-wife (Elaine Wynn) owns 9%.  Elaine Wynn’s shares may be subject to sale restrictions agreed to as part of the divorce agreement, which would make these restrictions waivable by mutual agreement between the two former spouses.

It would certainly be surprising if Mr. Wynn was strongly opposed to a change in control of a company of which he no longer personally had control and with which he may soon be at loggerheads.

Further, depending upon how the current scandal plays out, Wynn Resorts long-term future might prove to be more promising under another name.  In fact, one could argue that the worse the scandal for the Wynn name, the quicker that shareholders will receive a change in control premium through a sale of the company or some of its valuable assets.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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