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MGM shocked the gaming community on Tuesday by discontinuing its bid for a casino license in New York City.
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This decision is surprising given that opportunities for domestic growth in the gaming sector are limited.
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Nonetheless, there might be potential benefits for investors in MGM.
Some occurrences can be categorized as surprises, while others are truly jaw-dropping. MGM Resorts International’s (NYSE: MGM) decision to withdraw from the competition for a New York City casino license falls into the latter category.
A brief overview: MGM, the largest casino hotel operator on the Las Vegas Strip, made headlines in 2018 when it announced an $850 million acquisition of Empire City Casino in Yonkers, New York, finalizing the purchase in January 2019. This acquisition proved to be a wise investment as MGM quickly transformed the slots-only venue into one of the top-performing regional casinos nationwide, leading New York legislators to approve plans in 2022 for three licenses for Las Vegas-style gaming establishments in the city.
The licensing process intensified last year, during which time industry experts and political analysts in New York believed that Empire City was almost guaranteed to secure one of the three licenses. MGM’s established relationship with state regulators, along with Empire City’s record of generating billions in tax revenue, contributed to this expectation.
In light of this context, the news of MGM’s exit from the New York license competition is more surprising than it may seem, especially given that many analysts see New York as a prime opportunity for the gaming industry. With speculation that New York’s casino market could potentially surpass Las Vegas in revenue, MGM’s withdrawal is even more unexpected.
The choice to step back from the New York licensing race was not made lightly by MGM. However, financial considerations played a significant role in this decision. The company had committed to a $2.3 billion redevelopment of Empire City had it received a license, all while acknowledging that each license could cost up to $500 million.
MGM indicated that it had prepared for a 30-year licensing agreement, only to learn that recent guidelines from New York would limit that term to 15 years. This means that if MGM had secured a license, it would have faced the challenge of renegotiating the license at potentially elevated costs in a much shorter timeframe.
Ultimately, it seems MGM is avoiding at least $2.8 billion in expenditures by not pursuing its plans in New York City. This substantial amount offers the company a variety of options for deployment, including paying down debt or expanding share buyback initiatives.
