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Bear Stearns on MGM Grand/Mirage Resorts Combo: Good Fit and Substantial Savings

4 April 2000

Bear Stearns has issued a detailed new report on MGM Grand and Mirage Resorts, a report that eagerly anticipates the acquisition of the latter by the former. The $6.4 billion deal will close some time this year.

Analyst Jason Ader and his crew say the combined company is a good strategic fit of two gaming giants and will realize at least $100-$150 million in cost savings.

Although the majority of assets of both firms are in Las Vegas, the combined company will have a significant presence in two other important U.S. markets: Michigan and Mississippi.

The report estimates that 82 percent of its operating cash flow will come from Nevada, 10 percent from Michigan, 6 percent from Mississippi and 2 percent from overseas.

At some point, Atlantic City will be added to the portfolio. Each company has ground there and plans for a casino, but Bear Stearns believes the Mirage property is the one that will be developed.

MGM Grand Detroit, which opened as that city's first casino in July, has been a huge hit. It had revenue of $100.9 million for the fourth quarter of 1999.

The report says the main MGM Grand property in Las Vegas led that market last year. It opened the successful Mansion at MGM Grand, 30 exclusive suites and villas to cater to high rollers, in April 1999. This month, the Mansion will get its own high-end casino.

MGM Grand and Mirage together will be the world's second-largest gaming company. The statistics are staggering: 14 properties, 25,800 hotel rooms, almost 1 billion square feet of casino space and a projected cash flow next year of $1.3 billion.

The report estimates that the two companies combined will control nearly 50 percent of baccarat volume on the Las Vegas Strip. That's important: last year baccarat revenue accounted for 12.2 percent of all Strip gaming revenue.

Baccarat is the favorite game of "whales" - the highest of the high rollers. They like the game, the report says, because of the fast action and high stakes, at comparatively favorable odds.

Players are dealt 40 to 60 hands an hour, and the house edge is only 1.2 percent. Bets on a single hand may exceed $100,000.

Bear Stearns estimates that there only about 200 players worldwide at the highest level - people with credit limits of more than $1 million and who may bet $1 billion in a year.

Because of the low house edge, the game is volatile. Casinos sometimes lose a bundle to whales at baccarat.

"Only a handful of casinos on the Strip can afford to provide such high stakes against such odds," the report notes.

With MGM Grand and the Mirage properties controlling so much baccarat play, Bear Stearns says, the combined company will be able to eliminate duplicative marketing offices _ many of which are in Asia _ and enforce tighter credit policies.

The game also makes the combined company especially susceptible to downturns in the economy. In 1998, when many Asian economies tanked, baccarat revenue on the Strip declined 20.5 percent.

Bear Stearns believes that MGM Grand's acquisition of Mirage is indicative of what will be increased consolidation in the gaming industry. That allows the giant companies to cut costs. In addition, they typically have deep management talent and they are able to borrow money at lower cost than smaller firms.

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