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Gaming Guru

Rod Smith
 

As Shock Wears Off, Analysts Warm Up To MGM Mirage's Bid for Mandalay

7 June 2004

LAS VEGAS -- MGM Mirage's offer to buy rival Mandalay Resort Group might have caught everyone by surprise, but it shouldn't disappoint shareholders and the gaming industry, Wall Street analysts and insiders said this weekend.

MGM Mirage late Friday offered to purchase Mandalay Resort for $68 per share in a cash transaction, the value of which would be about $7.65 billion, including the assumption of $2.8 billion in debt.

"I'm starting to feel more comfortable with the transaction. A compelling case can be made there won't be concentration or pricing issues," Deutsche Bank analyst Marc Falcone said.

The combined company would control 22,000 slots on the Strip, 40 percent of the total 55,800 slots. It would also control 1,120 table games, or 44 percent of the 2,571 total, and 36,562 rooms, or 49 percent out of Deutsche Bank's estimate of 74,000 rooms on the Strip.

Falcone said whether that is a problem will depend on whether regulators look at ownership concentration on the Strip, or in Clark County, or in the state of Nevada. The market share that the combined company would control becomes smaller as the market analyzed becomes larger.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said the biggest antitrust issue for federal and state regulators will be whether the deal gives the emerging company unfair pricing power, although he noted there still would be a large amount of competition on the Strip, in Clark County and in the state.

Falcone also said it is unlikely that the bid of $68 per share would be the final price paid for the acquisition because MGM Mirage is likely to up the ante in the course of normal negotiations to close the deal.

He cited the 1999 MGM Grand offer of $5.4 billion, or $17 a share, for Mirage Resorts. After six months of negotiations, the companies agreed on a price $6.4 billion, or $21 a share, for the deal, which closed in 2000.

Hausler said the offer price of about 8.5 times cash flow, a key measure of profitability, is a good multiple, but MGM Grand ultimately paid 9.6 times cash flow for Mirage Resorts, indicating some leeway for negotiations.

Joe Greff, gaming analyst at Fulcrum Global Partners, said it is likely that Mandalay's owners will set their sights on $75 a share, but that it would be a workable price because the deal is "accretive," or adds to earnings, for MGM Mirage up to $81 a share. A sale at that price, however, would cost more than $9 billion.

Whatever the final price, Hausler said it would be a "blockbuster deal," creating the world's largest hotel-casino company.

"You'll have a company like nothing we've seen in the gaming industry before in terms of revenue and cash flow," he said.

Mandalay should have revenues of $2.8 billion and cash flow of $815 million in 2006, and MGM Mirage should have revenues of $4.2 billion and cash flow of $1.3 billion, according to Fulcrum Global Partners estimates.

"It puts together two mid-cap gaming companies and creates the first really large-cap gaming company in terms of cash flow: more than $2 billion even if they have to sell off one of the Detroit (casino) assets (because of antitrust concerns)," Hausler said.

Falcone also said it is possible that other companies, particularly Harrah's Entertainment and Caesars Entertainment, will make competing bids to take over Mandalay.

Harrah's President Gary Loveman and Caesars President Wally Barr were both unavailable for comment this weekend.

"I'm sure Harrah's and Caesars will evaluate what this means to their companies. It's a possibility but not a sure thing another company may bid," Falcone said.

Harrah's cash flow and balance sheet are strong enough for it to make a bid, he said, although Caesars has a little less flexibility, depending on the structure and size of the transaction.

Greff said that, realistically, only Harrah's is in a position to shell out the cash to beat the MGM Mirage offer.

No matter whether the MGM Mirage offer sets off a bidding war, Falcone and Greff said it will make other major gaming companies start looking more seriously at other acquisition opportunities.

"It'll put the onus on Harrah's and the other gaming operators to make acquisitions if they want to compete with the new behemoth," Greff said.

Hausler said the most attractive element of the buyout for MGM Mirage is the Mandalay Convention Center, which would make it a better-rounded company and also help Las Vegas compete even more effectively with other business travel destinations for convention and meetings business.

Otherwise, he said it does little to change fundamentals for the emerging company or the industry because both companies have similar profiles, getting 75 percent of their profits from their Strip operations.

On a national scale, it could make the emerging company a more compelling investment opportunity because of the favorable tax and regulatory environments in Nevada, Hausler said.

Falcone said the deal needs to be approved by the boards of directors and shareholders of the two companies, but neither is an obstacle to closing the sale.

Even at $68 a share, he said the deal is "excellent" for Mandalay shareholders, whose stock closed Friday at $60.27 after trading at $31.03 a year ago. MGM Mirage stock closed at $46.03 on Friday.

Falcone said it is also a good deal for long-term MGM Mirage shareholders because of the tremendous potential for the Las Vegas market and the increased share of the market the combined company would control.

"For the industry, it's a natural evolution of consolidation to occur. This will probably be the first of several consolidations that we see over the next few years given the high cost of entry and the limited supply (of gaming licenses available). To continue to grow, they'll have to consolidate," he said.

Billy Vassiliadis, president of R&R Advertising and the gaming industry's chief marketer and lobbyist, said the proposed deal is "remarkable" because of the company being created and is part of the evolution that has been going on in gaming.

"We're seeing consolidation in every large industry, and we've been watching consolidation in the (gaming) industry," Vassiliadis said. "There's increased competition both abroad and from tribal interests, and companies are looking to combine strengths both in talent and financial statements.

"I would assume for the companies this is something that would allow them to compete very strongly."

He added, "I think the entire industry, as we've seen discussed at the (Las Vegas Convention and Visitors Authority) in recent years, has had to go through a lot of introspection and review to strengthen itself in the wake of what's happening in Macau, Singapore, Great Britain, eastern Europe and other opportunities outside the United States.

"Resort gaming has become a big competition."

Vassiliadis said the recent merger of Coast Resorts and Boyd Gaming highlighted the continued talk of industry consolidation, and MGM's acquisition of Mirage Resorts established that company as "very bold and very forward-thinking in where they want to go."

Company officials across the industry declined to discuss the merger, but one who asked not to be named said the deal is still a two-edged sword.

"It puts the new company and Las Vegas in stronger positions to compete globally, but it is also a sign that competition is heating up for all of us," he said.

Review-Journal writer Erin Neff contributed to this report.

As Shock Wears Off, Analysts Warm Up To MGM Mirage's Bid for Mandalay is republished from Online.CasinoCity.com.