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Best of Howard Stutz

Gaming Guru

Howard Stutz

CityCenter worth about half of building cost

21 October 2009

LAS VEGAS, Nevada -- CityCenter is worth about half of what it cost MGM Mirage and Dubai World to build the massive Strip development, according to third-party valuation specialists.

In a statement to investors Tuesday, in which MGM Mirage said it was writing down more than $1 billion related to CityCenter, the company estimated the value of its 50 percent ownership in CityCenter at approximately $2.44 billion. The project's total construction budget is $8.5 billion.

"This decision and related market conditions led to the conclusion that the carrying value of the residential inventory is not recoverable," MGM Mirage said in a statement.

MGM Mirage said CityCenter was required to have unnamed third parties review its residential inventory for impairment because of the company's decision to reduce the cost of project's 2,400 residential condominiums by 30 percent.

Also, MGM Mirage's largest shareholder, billionaire Kirk Kerkorian, hinted he might divest himself from the company.

MGM Mirage said it would write down $955 million of its CityCenter investment in a pretax, noncash charge. In a statement, the company said its joint venture with Dubai World in CityCenter would take a $348 million noncash charge related to the development's residential real estate. MGM Mirage suspects it will have to cover about $200 million of the write-down.

The company may provide more information on the write-downs when it reports earnings Nov. 5.

The 67-acre CityCenter development, which has a 4,004-room hotel-casino, boutique hotels, high-rise residential and dining, entertainment and a retail district, opens in December.

Wall Street, which watched as CityCenter came close to bankruptcy in April and has seen the project hampered by cost overruns, had little reaction to the news. Shares of MGM Mirage closed at $11.93 on the New York Stock Exchange, up 13 cents, or 1.1 percent.

"Investors have long expected (and will probably expect further) write-downs of the carrying value of its residential towers at CityCenter, especially after it reduced unit pricing by 30 percent or so," BMO Capital Markets analyst Jeffrey Logsdon said in a note to clients. "We do not expect investors to have a negative reaction to this step."

In a separate announcement, MGM Mirage majority shareholder Kirk Kerkorian said he might reduce his 37 percent stake in the company. According to a filing with the Securities and Exchange Commission, Kerkorian controls more than 163.1 million shares of MGM Mirage.

In a brief statement released through Tracinda Corp., his privately held investment arm, the 92-year-old Los Angeles billionaire said the holding company was exploring the possibility of strategic partnerships with respect to his MGM Mirage investment.

Tracinda "believes there is substantial unrecognized value in MGM Mirage and CityCenter that is not reflected in the market value of MGM Mirage's stock." Tracinda said it won't engage in a transaction until CityCenter is complete.

Kerkorian's holdings in MGM Mirage decreased from 58.3 percent in May to 37 percent when the company completed a $2.6 billion restructuring package.

Gaming analysts speculated that Kerkorian, who founded the company's predecessor, MGM Grand Corp., and sits on the MGM Mirage board of directors, may be trying to drive up the price per share.

In 2006 and 2007, Kerkorian twice tried to move the needle on MGM Mirage, including by suggesting he would take both CityCenter and Bellagio private in 2007 before Dubai World purchased half of the project.

"It's hard to guess what exactly Kirk Kerkorian is up to here," Susquehanna Financial Group gaming analyst Robert LaFleur said. "This could be a public statement that Tracinda believes MGM Mirage shares are undervalued. This could also just amount to nothing, as the filing just suggests he is just mulling the possibility of a sale."

Union Gaming Group principal Bill Lerner said Kerkorian might have finally reached a point where he wants to get as much value for his holdings as possible. Lerner wouldn't be surprised if Kerkorian sells his stake.

"I think it's real and I think he wants to distribute wealth given his age," Lerner said. "He seems to be telling the market he'll do it responsibly."

Lerner thought Kerkorian would rather sell his shares to a partner rather than sell them on the open market.

Kerkorian tumbled the furthest of all gaming executives recently on the Forbes 400 List of Richest Americans, falling from 27th in 2008 with $11.2 billion, to 97th in 2009 with a net worth of $3 billion.

MGM Mirage's declining stock since the end of 2007 reduced the value of Kerkorian's holdings in the company from $11 billion to $1.5 billion. Other Kerkorian investments in oil and automotive industries also suffered throughout the year.

CityCenter worth about half of building cost is republished from