Deutsche Bank: MGM Is 'Undervalued,' But REIT Conversion Is A 'Low Probability'

In a report published Tuesday, Deutsche Bank analyst Carlo Santarelli commented on Land & Buildings' proposal to split MGM Resorts International (NYSE: MGM) into a REIT and C-Corp.

"While we believe MGM shares are fundamentally undervalued and believe price discovery on the Strip would serve as a meaningful catalyst, we struggle with some of the assumptions of the current proposal," Santarelli wrote.

The analyst expanded: "L&B assumes the REIT would trade at 15.0x 2016 EBITDA with the C-Corp trading at 11.9x 2016 EBITDA, producing respective values of $25 and $9, less $1 for transaction fees. While the 15.0x multiple applied to the REIT cash flow stream of $1,313 mm implies a value of $21.0 billion in the presentation, we calculate 15.0x this stream actually equates to approximately $19.7 billion, or, over $2 per share less than the $25 value.

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"We note," he added, "that every turn of the REIT multiple equates to approximately $2.30 in equity value while every turn on the C-Corp multiples equates to approximately $1 in equity value."

Santarelli also says shares of MGM would be worth $31 under a restructuring –- not the $33 per share Land & Buildings estimates, because a 15.0x multiple is "aggressive."

Bottom line: The analyst stated that the proposal has some strategic advantage and could create "meaningful" equity value, but there is a "low probability" of such a transaction occurring.

Shares are Buy rated with a $29 price target.