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Wynn's Board Showed Surprising Modesty About What A Share Of Wynn Is Worth

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Possibly the best thing about the Wynn-Okada saga is the payment to Okada in exchange for poofing his shares away. Recall that Wynn's charter lets the board disappear the shares. But they can't just disappear them for free - that would be unfair. They have to pay a fair price for them:

"Redemption Price" shall mean the price to be paid by the Corporation for the Securities to be redeemed pursuant to this Article VII, which shall be that price (if any) required to be paid by the Gaming Authority making the finding of unsuitability, or if such Gaming Authority does not require a certain price to be paid, that amount determined by the board of directors to be the fair value of the Securities to be redeemed; provided, however, that the price per share represented by the Redemption Price shall in no event be in excess of the closing sales price per share of shares on the principal national securities exchange on which such shares are then listed on the trading date on the day before the Redemption Notice is deemed given by the Corporation to the Unsuitable Person .... The Redemption Price may be paid in cash, by promissory note, or both, as required by the applicable Gaming Authority and, if not so required, as the board of directors determines. ... [T]he principal amount of the promissory note together with any unpaid interest shall be due and payable no later than the tenth anniversary of delivery of the note and interest on the unpaid principal thereof shall be payable annually in arrears at the rate of 2% per annum.

As it happens, Okada is now the proud owner of a $1.9bn 10-year subordinated note at 2% interest. Wynn has 2020 first mortgage bonds trading at 4.4%. Let's generously say that a 10-year parent company subordinated note should trade at 7%; that makes a 2% note worth about 65 cents on the dollar, making that Wynn note worth about $1.26bn. That's call it $1.5bn less than the $2.77bn value of Okada's shares on the day before the February 18 redemption notice (24.55mm shares at $112.69), or about a 55% discount.

So ... fair ... then. The board thinks so:

The Company engaged an independent financial advisor to assist in the fair value calculation and concluded that a discount to the current trading price was appropriate because of restrictions on most of the shares which are subject to the terms of an existing stockholder agreement. Pursuant to the Articles, the Company has issued a 10-year $1.9 billion promissory note in redemption of the shares.

That independent advisor was Moelis & Co.:

Harry Curtis - Nomura Securities Co. Ltd., Research Division: Okay. And then, Matt, can you just walk us through the math behind the 30% discount, why that's the right number?

[Wynn CFO] Matt Maddox: So we engaged Moelis & Company to provide a evaluation and also fairness opinion. And they focused on a variety of factors, including the restrictions in the shareholder agreement. As Kim pointed out, they made these securities not freely tradable. And I don't want to get into the details of that but I think any of you can do your own analysis and can probably see the merit in this discount.

You'll note that the 30% nominal discount is somewhat less than the 55% economic discount that I get, which is the advantage of paying with a promissory note ($1.9bn is a 30% discount to $2.77bn, but of course Okada isn't getting $1.9bn).

The "not freely tradable" point would be a reference to the Wynn Stockholders Agreement, which includes an agreement to vote together to put each other's nominees on the board and, more relevantly, a right of first refusal: if Okada wants to sell, he needs to get an offer and give Wynn 15 days to match it. This is effectively a prohibition on transfer without Wynn's consent.*

I was kind of impressed that Moelis would put its name to a fairness opinion here. In my former life, I made a point of staying away from valuation of horrible creepy illiquidity features of publicly traded equity, and would stay even further away from doing so for a board in the context of a nasty dispute with a litigious shareholder. In, y'know, the casino industry. Perhaps Moelis were emboldened by the fact that under Nevada law and Wynn's charter, the board don't owe nothing to nobody so presumably their fairness opinion provider is pretty safe from lawsuit as well.

For what its worth, though, the internet suggests that the 30% number is plausible. Here are somethings in that ballpark, and here is a strikingly detailed IRS paper describing various methods some of which are mildly insane ("the discount is the price of a two-year put on the stock" what?) and some of which are sensible but data-limited (compare trading prices of 144-restricted vs. unrestricted shares in the same public company) and the answer actually seems to be "like, 30%," so there you go, good on Moelis & Co. Presumably they weren't paid to value that subordinated note.

Incidentally Wynn's Forbes 400 ranking doesn't specifically say whether it applies a 30% discount to his WYNN shares, which are subject to the same agreement - anyone want to take a guess? In any case, he did pretty well on booting Okada. WYNN opened at $118.65 the day after Okada was ejected; meaning that Wynn made about $60mm on the reaction (just under $6 a share on just over 10mm shares).

If you believe Moelis, though, even more valuable would be freeing Wynn's shares from the transfer restrictions of the stockholders' agreement by dissolving it. By my count he had $790mm worth of stock last Friday,** and would have had $1,190mm worth on Monday - a $400mm pickup caused a little by the stock price move but a lot by the illiquidity discount vanishing. Except. Except that two years ago the stockholders' agreement between Wynn and Okada was amended to add a third party, whose shares were not exploded last weekend: Wynn's ex-wife. Perhaps she'll obligingly bribe a gaming regulator?

* People don't always notice how diabolical ROFRs on public shares are so it's worth spending a minute on. Let's say WYNN trades at $112 and someone wants to buy your stock and you've got a ROFR. If he offers you $112 then Wynn has a 15-day call on the stock at $112, and so the buyer is short a 15-day put (and you're flat, ponder it): Wynn gets any upside over $112, and the buyer gets any downside below it. That's unpleasant for the buyer, who will want to offer a discount to the market price - but that makes Wynn's call even more valuable / makes it even more likely that Wynn will end up buying under the ROFR. Of course the buyer could offer above market but why do that when he could just buy shares in the market without overpaying or dealing with the ROFR? There's enough asymmetry that it's hard to conclude any deal that works for a buyer and Okada. And that's leaving aside that the buyer would be subject to the same agreement.

** $112.69 x 10,026,708 shares - minus 30% for illiquidity!


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