MGM Flailed Following Offering: Too Much Too Soon? (WYNN, LVS)

After making a 17% run since last Friday, shareholders of MGM (NYSE: MGM) (and other casinos stocks ) have cashed in their chips over the course of three days, to the chagrin of investors that got in last Friday. Shares of the company are down 3.2% today, and nearly 18% since Tuesday.

Casinos began to surge as the Nevada Gaming Control Board said that August revs on the strip increased 12% over 2009. That was all it took for casinos to take the baton and run. Wynn Resorts (Nasdaq: WYNN) closed 5.1% higher, Las Vegas Sands (NYSE: LVS) ended 4.2% better, and MGM made a huge 15.7% move on the news.

The good news provided just the catalyst that MGM needed to raise capital through a surprise 41 million common stock offering, which priced at $12.65. Shares dropped by more than 11% from the close on Tuesday, to the open on Wednesday, as investors realized that the casino stocks were still a little more risky than they were willing to take on, despite recent positive news from Vegas and Macau.

Reasoning? Usually when a company prices and secondary offering, stock prices tend to hover around those levels, plus or minus 1%. That didn't stop MGM's price from being pushed down further, eventually penetrating the $12 level, and now going for the low-$11's. This could spell disaster, as people that decided to participate in the offering are now immediately underwater with their investment, and seeking to hedge their position. Seeking Alpha also notes that underwriters are risking their reputation by not doing enough due diligence on the company, and selling shareholders would face some losses with their residual value.

It’s a beautiful thing for those short on the stock though. (Note: Author holds no position.)

There's more detail about the whole offering and potential fallout for the casinos based on this offering. With mounds of debt on their books, MGM had to find a way to raise enough capital to keep themselves solvent, at least for a little while longer. Consequently, investors will be more cautious going forward on any price surges in the shares, which could turn them even more volatile than they already are.

Some reassurance resides in some firms, such as Barclays, that will make an attempt to buy shares in order to get the price back up to $12.65, with no need to go beyond that point. This will allow for some that got caught up in the investment early to exit their positions, and write off the transaction altogether (minus any fees, commissions, etc.).

The casinos will certainly be ones to watch over the next several weeks, as Hudson Securities noted in a recent report that "December [room] rates [on the strip] look pretty soft so far..."

Finally, some analyst firms made a change based on rencent events:

• On Wednesday, Goldman Sachs said the move was a “strategic positive” as it will reduce net debt to EBITDA;
  
  
• Also on Wednesday, Soleil downgraded the shares from Buy to Hold, citing the offering and pre-announcement of Q3 results; and
  
  
• Thursday saw BMO upgrade the shares from Market Perform to Outperform, with a price target increased from $11 to $18.

Shares of MGM are trading 3.5% lower today, Wynn is up 1.2% and LVS is up 0.5%.

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