Thin End of the Wedge?
Pansy Ho’s ‘non-compete’ deal with MGM Resorts has some scratching their heads; and others holding their nosesWednesday, 01 June 2011
Is MGM Resorts International’s ‘non-compete’ agreement with Pansy Ho compatible with Macau’s legal framework for its gaming industry?
If ‘yes’, what if anything will the agreement do to the competition landscape in Macau? If ‘no’, what is the Macau government going to do about the deal?
The non-compete deal has come about because it looks as though for the first time ever, an individual—Ms Ho—will be allowed to be a shareholder and director of two supposedly competing companies in the Macau gaming market—MGM China Holdings and her father Stanley Ho’s former investment holding company STDM, the parent of SJM Holdings. Even Dr Ho never managed a feat like that in his long career.
The reason it is being allowed now looks due in part to Dr Ho’s fragile health and the succession battle that this parked among his surviving consorts and children for control of STDM and SJM. The Macau government seems to think letting Pansy Ho have some control over MGM China and STDM simultaneously is a lesser evil than having a chaotic succession at STDM/SJM. The latter companies are, after all, essentially proxies for maintaining Chinese control over a burgeoning gaming market with major foreign participants in it.
It took two months of bitter in-fighting among Dr Ho’s surviving consorts and children to arrive at a compromise deal whereby Ms Ho becomes a director of STDM and Dr Ho’s fourth consort Angela Leong gets to run SJM for at least the next six years. No one in power in Macau seems to want to throw all that away on a nicety such as worrying about anti-competitive behaviour issues involving STDM/SJM and MGM China.
Ms Ho said recently at a Hong Kong press conference—supposedly to discuss the initial public offering for MGM China Holdings, her joint gaming venture in Macau with MGM Resorts—that she wanted to be an ‘MVP’ (most valuable player). She didn’t say she wanted to play every position on the field, which is how the twin track approach of directing MGM China and STDM looks to some observers.
In theory, anti-competitive practices are illegal in Macau. Article 21, paragraph 3, of Macau Law 16/2001 states: “Any form of arrangement amongst concession companies or associated companies of a concession company which may obstruct, restrict, impair or destroy fair competition shall be prohibited”.
The clause was inserted in that particular law—a statute setting out the framework for the Macau gaming industry after market liberalisation—because Macau did not have (and still does not have) a law dealing with restrictive trade practices. Whether Article 21, paragraph 3 will ever be enforced is another matter.
MGM Resorts is to some extent stuck in the middle of the STDM succession drama—an issue not of its making. MGM Resorts would much rather have Ms Ho on board at MGM China for the time being. It has plans to expand its non-gaming hospitality offer into mainland China and it needs Ms Ho’s political clout on the mainland to assist with that. Equally, Ms Ho should benefit from her closeness to the global leisure brand when she’s scouting for new business opportunities in the People’s Republic. But the non-compete agreement offers potential traps in MGM Resorts’ home markets. Those traps are not so much in its core market of Las Vegas—the company owns too much of the gaming real estate on the Las Vegas Strip ever to be put under any serious regulatory pressure by the Nevada authorities. But it could face awkward regulatory questions in its smaller US markets such as Michigan. MGM Resorts’ predecessor company MGM MIRAGE was forced to announce a pull out from its joint venture with Boyd Gaming in Atlantic City because the New Jersey Division of Gaming Enforcement was unhappy about it even being connected with Pansy Ho.
MGM Resorts’ non-compete agreement with Ms Ho presupposes she will be a person of influence at STDM, even if technically she’s only a minority shareholder there. That means she will be expected to wield that influence either passively—by leaving the room or abstaining when a piece of STDM business relevant to MGM China’s interests is discussed—or to wield the influence actively, by seeking to steer STDM, SJM or Shun Tak away from a course of action that might hurt MGM China’s interests. The latter is explicitly mentioned in the agreement.
So Ms Ho has either to wield influence at STDM to make MGM Resorts happy—in which case she risks upsetting the rest of the Macau market operators and possibly also her fellow directors at STDM—or she will have to choose between MGM China or STDM. Some think it would be better for the proper functioning of the market if she were forced to choose between the two now.
Let them eat cake
But where’s the incentive if she can have her cake and eat it? Ms Ho is certainly dining handsomely on the MGM Macau part of the cake. Her sale of 21% of MGM China Holdings in a Hong Kong flotation in late May (she previously held 50% of the joint venture) was expected to net her US$1.21 billion to US$1.5 billion cash, giving her a net worth of about US$5.1 billion and overnight making her Hong Kong’s richest woman.
Is an attack on her non-compete deal with MGM Resorts merely envy at her success? Does it matter if she’s a shareholder and director of two Macau gaming operators if she only holds a minority stake in each? They’re all good questions, and find echoes in anticompetitive practices that have been enthusiastically pursued for years in Hong Kong, where specifically, price-fixing for many goods and services abound.
Inside Asian Gaming makes no suggestion that price-fixing is the aim of the MGM Resorts non-compete agreement. But here’s why a non-compete agreement might cause problems for Macau. Macau depends for its international credibility as a gaming investment market on the notion that over time its regulatory and legal standards are converging with international standards, not diverging from them. North America and the European Union have outlawed most forms of anti-competitive agreement—as well as their ugly big sister, price-fixing cartels. It could therefore make overseas gaming regulators distinctly uncomfortable—and possibly harm Macau investors’ interests directly or indirectly—were the Macau government to encourage, or simply allow by default, an anti-competitive climate and anti-competitive practices to develop in relation to the local casino market.