Harvard Case - Melco Crown Entertainment: Rolling the Dice and Other Ways to Raise Capital
"Melco Crown Entertainment: Rolling the Dice and Other Ways to Raise Capital" Harvard business case study is written by Stephen Sapp, Matthew Gray. It deals with the challenges in the field of Finance. The case study is 15 page(s) long and it was first published on : Aug 31, 2012
At Fern Fort University, we recommend that Melco Crown Entertainment (MCE) pursue a strategic combination of debt financing, equity financing, and asset sales to fund its ambitious expansion plans while maintaining a healthy financial profile. This approach will allow MCE to leverage its strong brand and market position while mitigating potential risks associated with excessive debt or dilution of ownership.
2. Background
Melco Crown Entertainment (MCE) is a leading gaming and entertainment company with operations in Macau and the Philippines. Founded in 2004, MCE quickly established itself as a major player in the Asian gaming market, attracting significant investment and expanding its portfolio of luxury casinos and resorts. However, MCE faces a critical juncture as it seeks to navigate the competitive landscape and fund its ambitious expansion plans.
The case study focuses on MCE's need to raise capital for its ambitious expansion plans, including the development of a new integrated resort in Manila. This expansion requires significant investment, prompting MCE to explore various financing options, including debt financing, equity financing, and asset sales.
The main protagonists in the case are:
- Lawrence Ho, Chairman and CEO of MCE, who is tasked with leading the company's growth strategy and securing necessary funding.
- The MCE Board of Directors, who are responsible for overseeing the company's financial performance and approving major investment decisions.
- Potential investors, who are evaluating MCE's financial health and future prospects before committing capital.
3. Analysis of the Case Study
The case study highlights several key challenges for MCE:
- High debt levels: MCE's existing debt burden poses a significant risk, particularly in a volatile market environment.
- Competition: The Asian gaming market is highly competitive, with established players and new entrants vying for market share.
- Economic uncertainty: Global economic conditions and political instability in key markets add to the complexity of MCE's financial planning.
To analyze MCE's situation, we can utilize a framework that considers both financial and strategic aspects:
Financial Analysis:
- Financial statements analysis: Examining MCE's income statement, balance sheet, and cash flow statement reveals its profitability, asset base, and cash flow generation capabilities.
- Ratio analysis: Key ratios such as debt-to-equity ratio, return on equity, and cash flow coverage ratio provide insights into MCE's financial health and risk profile.
- Valuation methods: Analyzing MCE's market value and comparing it to its intrinsic value based on discounted cash flow models helps determine its attractiveness to investors.
- Capital budgeting: Evaluating the projected profitability and return on investment (ROI) of the Manila project is crucial for justifying the necessary capital expenditure.
Strategic Analysis:
- Competitive analysis: Understanding the strengths and weaknesses of MCE's competitors, including their market share, pricing strategies, and customer base, is essential for developing effective strategies.
- Growth strategy: MCE's expansion plans should align with its core competencies and long-term vision for the Asian gaming market.
- Market analysis: Understanding the growth potential and regulatory environment of the Philippine gaming market is crucial for assessing the viability of the Manila project.
- Risk assessment: Identifying and mitigating potential risks associated with the expansion plans, such as economic downturns, regulatory changes, and competitor actions, is crucial for ensuring long-term success.
4. Recommendations
Based on the analysis, we recommend the following strategic approach for MCE:
- Debt Financing: MCE should explore opportunities for debt financing, including bank loans, bonds, and private placements, to secure a portion of the required capital. However, it should prioritize debt financing with favorable terms and a manageable debt-to-equity ratio.
- Equity Financing: MCE should consider a combination of equity financing options, including a public offering (IPO) or a private placement of shares, to raise additional capital. This approach will dilute ownership but can provide access to a wider pool of investors.
- Asset Sales: MCE should evaluate the possibility of selling non-core assets to generate cash flow and reduce its debt burden. This could include divesting properties or business units that are not central to its long-term strategy.
- Strategic Partnerships: MCE should actively seek strategic partnerships with other companies in the gaming, hospitality, or entertainment industries. These partnerships can provide access to new markets, technology, or expertise.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: MCE's core competency lies in developing and operating luxury casinos and resorts. The expansion plans align with this mission and offer opportunities for growth in a promising market.
- External customers and internal clients: The expansion plans are aimed at attracting new customers and expanding MCE's reach in the Asian gaming market. This will benefit both external customers and internal stakeholders, including employees and investors.
- Competitors: MCE's competitors are actively expanding in the Asian market. By securing the necessary capital, MCE can maintain its competitive edge and capitalize on growth opportunities.
- Attractiveness - quantitative measures: The Manila project is expected to generate significant revenue and profitability, justifying the required investment based on NPV and ROI calculations.
6. Conclusion
By pursuing a balanced approach to financing, MCE can secure the necessary capital for its expansion while managing its financial risks. This strategy will allow MCE to capitalize on growth opportunities in the Asian gaming market, maintain its strong brand position, and deliver value to its shareholders.
7. Discussion
Alternative strategies could include:
- Focusing solely on debt financing: This could lead to excessive debt levels and increased financial risk, making MCE vulnerable to economic downturns or changes in interest rates.
- Relying solely on equity financing: This could result in significant dilution of ownership and potentially alienate existing shareholders.
Key risks and assumptions associated with the recommended strategy include:
- Economic downturn: A global economic downturn could negatively impact MCE's revenue and profitability, making it difficult to service its debt obligations.
- Regulatory changes: Changes in gaming regulations in the Philippines could impact the viability of the Manila project.
- Competition: Aggressive competition from existing and new players could erode MCE's market share and profitability.
8. Next Steps
To implement the recommended strategy, MCE should take the following steps:
- Develop a detailed financial plan: This plan should outline the specific sources of funding, the timing of capital raises, and the expected impact on MCE's financial performance.
- Negotiate with potential lenders and investors: MCE should engage in discussions with banks, bond investors, and equity investors to secure favorable financing terms.
- Conduct due diligence on potential acquisitions or partnerships: MCE should carefully evaluate potential targets and partners to ensure they align with its strategic goals and financial objectives.
- Monitor the progress of the Manila project: MCE should closely track the development of the project and adjust its financing strategy as needed.
By carefully implementing these steps, MCE can navigate the challenges of financing its expansion plans and achieve its ambitious growth targets.
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Case Description
The case deals with how the investment banker advising the chief financial officer of Melco Crown Entertainment Limited (MCEL), a casino and entertainment company based in Macau, suggests the company finance two new gaming resorts currently under construction. The development of these properties has stopped because of insufficient funding, and project timelines have started to be questioned. A decision regarding the best means to raise the necessary capital needs to be made quickly or MCEL may not be able to capitalize on the lucrative, growing gaming market in Macau. The advice must consider both the immediate need to raise capital to get the projects back on track as well as the need for long-term financial flexibility to take advantage of future opportunities. The case considers a variety of domestic and international options to determine what best meets MCEL's needs.
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