People Incorporated Retracts Offer for MGM Resorts International

MGM Shares Plunge as Acquisition Deal Fails to Materialize

People Incorporated formally withdrew its proposal to acquire all outstanding public shares of MGM Resorts International ($MGM) on Tuesday, October 24, 2023, citing an "unfavorable market environment" for the proposed $55-per-share all-cash transaction. The retraction brings an end to several months of speculation surrounding the potential acquisition of the Las Vegas-based casino and hospitality giant.

Following the announcement, $MGM shares experienced a sharp decline, opening significantly lower and closing down 9.87% at $45.20. The drop erased nearly $2.5 billion from the company's market capitalization and saw trading volume surge to 25.4 million shares, more than three times its 30-day average.

Market Impact

The immediate market reaction to People Incorporated's withdrawal was a decisive move lower for $MGM. The stock's nearly 10% single-day decline was its largest percentage drop since March 2020, when the broader market reacted to the onset of the global pandemic. This brought $MGM's share price back towards its pre-offer trading range, which had hovered between $44 and $46 per share before initial reports of People Incorporated's interest surfaced in late July.

The significant volume accompanying the sell-off indicates a broad unwinding of arbitrage positions and a recalibration of investor sentiment. While the broader S&P 500 Index saw a modest 0.73% decline on Tuesday, the impact on the leisure and hospitality sector was relatively contained. Peers like Las Vegas Sands ($LVS) and Wynn Resorts ($WYNN) experienced minor fluctuations, suggesting the move was highly specific to $MGM and the collapsed deal rather than a systemic re-evaluation of the entire casino industry.

The retraction also sent ripples through the corporate debt markets, as the substantial financing package required for People Incorporated's proposed $20 billion acquisition would have been a significant test of current market liquidity and appetite for leveraged buyouts. The "unfavorable market environment" cited by People Incorporated likely refers to rising interest rates, which have pushed the cost of debt financing higher, and increased economic uncertainty, which could impact the profitability outlook for large, debt-laden transactions. The U.S. Federal Reserve's benchmark interest rate currently stands at 5.25%-5.50%, a 22-year high, making large-scale M&A significantly more expensive than in prior years.

What Analysts Are Saying

Analysts are now re-evaluating $MGM's trajectory without the M&A premium. "The market was clearly pricing in a high probability of this deal closing, so the sharp correction in $MGM is not surprising," noted Sarah Chen, an equity analyst at Capital Markets Group. "The focus now shifts back to MGM's core operational strengths, particularly its digital expansion with BetMGM and its robust domestic portfolio." Chen maintains a 'Buy' rating on $MGM with a revised price target of $52, down from $58, reflecting the removal of the acquisition premium.

Conversely, some analysts express caution regarding the broader M&A landscape. "People Incorporated's withdrawal highlights the increasing hurdles for large-cap M&A in the current environment," stated Michael Davies, Head of M&A Strategy at Global Equities Research. "Higher borrowing costs, coupled with potential economic slowdowns impacting future earnings projections, create a wider bid-ask spread between buyers and sellers. This could signal a slowdown in significant deal activity across various sectors for the remainder of 2023 and into early 2024."

Goldman Sachs analysts, in a client note released Wednesday, highlighted $MGM's strong balance sheet and free cash flow generation as key factors for long-term value. "While the immediate impact is negative, $MGM retains a strong asset base and a clear strategy for growth, particularly in its regional casinos and the BetMGM venture, which reported net revenue from operations of $458 million in Q2 2023," the note detailed. "The company's ability to execute on its standalone strategy, potentially including increased share buybacks or dividend increases, will be critical for investor confidence moving forward."

What to Watch

Investors should closely monitor $MGM's upcoming third-quarter earnings report, scheduled for release on November 10, 2023. Management's commentary on its capital allocation strategy, including potential share repurchase programs or dividend adjustments, will be key to understanding the company's path forward without the People Incorporated acquisition. The company's prior share buyback authorization, which had $2.1 billion remaining as of June 30, 2023, could become a more prominent focus.

Key technical levels for $MGM shares will also be critical. The stock found immediate support near its pre-offer trading range, with $44.50 serving as a notable support level. A sustained break below this could signal further downside to the $40-$42 range, while a rebound would likely face resistance at $48.00, the level it traded at before Tuesday's decline.

Beyond company-specific catalysts, the broader macroeconomic environment will continue to influence $MGM's performance. The trajectory of inflation and the Federal Reserve's future interest rate decisions will impact both the cost of capital for potential future M&A and consumer discretionary spending on travel and entertainment. Any signs of a significant slowdown in consumer spending could pressure the hospitality sector.

Finally, while the People Incorporated deal is off the table, the long-term M&A landscape for $MGM remains a potential, albeit diminished, factor. Should market conditions improve and financing costs decrease, other strategic buyers might emerge. However, in the near term, $MGM is firmly positioned to execute its independent growth strategy, focusing on operational efficiency and leveraging its brand in both physical and digital gaming markets.