2021 has been a rather active year for mergers and acquisitions, and news of a major deal in the real estate sector was just announced. Gaming real estate investment trust (REIT) MGM Growth Properties (NYSE: MGP) has agreed to be acquired by fellow casino owner VICI Properties (NYSE: VICI) in a $17.2 billion all-stock deal.
Here's a rundown of each company's portfolio and investment strategy, the terms and rationale behind the deal, and what investors can expect going forward.
The two companies
Before we go any further, let's take a look at what each of these REITs owns and its general strategy so we're all familiar with the companies we're talking about.
First, MGM Growth Properties was formed in April 2016 for the specific purpose of owning a portfolio of real estate assets operated by gaming giant MGM Resorts (NYSE: MGM). The company owns or has an interest in seven properties located on the Las Vegas Strip, including The Mirage, Mandalay Bay, and the MGM Grand, as well as a top-notch portfolio of regional MGM properties including the Borgata in Atlantic City and MGM National Harbor in the Washington, D.C., area. The company's long-term growth strategy has been to build a portfolio of both gaming and non-gaming experiential properties, although thus far it is purely a gaming REIT.
VICI Properties is almost the same business, only with Caesars Entertainment (NYSE: CZR) as the dominant tenant. In fact, VICI was spun out of Caesars in 2018 and owns 28 properties. Caesars Palace in Las Vegas is the flagship asset, but there are also a ton of regional assets in the portfolio. VICI has a few other tenants, such as Penn National Gaming (NASDAQ: PENN), but Caesars is by far the largest tenant.
VICI is also in the process of acquiring The Venetian in Las Vegas as well as the adjacent Sands Expo Center, and like MGM Growth Properties, also has ambitions to expand its portfolio beyond gaming. It's also worth noting that VICI owns substantial tracts of land in prime locations along the Las Vegas Strip, which it could ultimately use to develop new assets from the ground-up, as the company sees massive opportunities for development along the Strip.
VICI Properties is acquiring MGM Growth Properties in an all-stock deal that values the company at $17.2 billion (including debt), based on VICI's recent share price. The terms of the deal require VICI to issue 1.366 new shares of its stock for each share of MGM Growth Properties investors own.
There are several strategic benefits VICI sees from this acquisition, which is why it's paying a substantial premium to MGM Growth Properties' recent stock price. Just to name a few:
- The deal will make VICI the largest experiential REIT in the world, with an enterprise value of about $45 billion. There are several synergies (cost savings) that come with scale, and VICI believes it could achieve financing synergies as well by refinancing MGM Growth Properties' debt at lower rates.
- Currently, Caesars Entertainment makes up more than two-thirds of VICI's rental income, even after the pending acquisition of The Venetian, an extremely high concentration from a single tenant. After this deal is complete, Caesars will make up 41% of VICI's rent, with MGM Resorts accounting for another 40%.
- Although VICI is paying a premium, it's getting MGM Growth Properties' assets at a significant discount to replacement cost. In fact, VICI estimates that the discount is in the 30% to 40% range, so this could turn out to be an excellent value investment if this is accurate.
- The deal is expected to add to VICI's investable free cash flow right away. Once the purchase of The Venetian and this acquisition are finalized, VICI estimates it will have $500 million in annualized free cash flow after paying dividends, which will allow it to accelerate its growth.
What investors need to know
For one thing, this is an all-stock deal. So, don't let headlines like "$17.2 billion acquisition" or "$43 per share" fool you -- there is no actual cash involved in this transaction, at least for individual investors. Upon the deal's closing, which is expected to happen in the first half of 2022, MGM Growth Properties investors will receive 1.366 shares of VICI Properties for every share they own. (For example, 1,000 shares of MGP would convert to 1,366 shares of VICI.)
So, the big question MGM Growth Properties investors need to ask themselves is whether they want to be investors in the combined company. With an estimated closing early next year, investors have several months to make this decision, but if you're an MGM Growth Properties investor, you may want to take a closer look at VICI's strategy and what the combined company will look like.