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Best of Howard Stutz

Gaming Guru

Howard Stutz

GAMING COMPANIES: MGM shares take a wild ride

21 June 2007

LAS VEGAS, Nevada -- Investors weren't sure how to handle MGM Mirage on Wednesday.

Two announcements a half-hour apart played havoc with the company's stock price, but also signaled a significant development move on land MGM Mirage recently acquired on the Strip's northern end.

Early in the morning, the Las Vegas-based casino giant announced an intent to form a 50-50 joint venture with Kerzner International Holdings to develop a multibillion dollar resort on 40 acres across from the Sahara.

Details of the project are being planned, but a definitive agreement could be announced by the end of September. The deal would mark the initial entry into the Las Vegas market by Kerzner, which built the Atlantis Paradise Island resort in The Bahamas.

About 15 minutes following that announcement, MGM Mirage majority shareholder Kirk Kerkorian filed a statement with the Securities and Exchange Commission that said he was forgoing his plans to try and buy Bellagio and the $7.4 billion CityCenter project from the company. Fifteen minutes later, MGM Mirage concurred that talks with Kerkorian's wholly owned Tracinda Corp. development arm had concluded.

The multiple events sent shares of MGM Mirage on a bumpy ride Wednesday on the New York Stock Exchange while analysts tried to put their own spin on the deal.

Shares of MGM Mirage were down 10 percent at one point on Wednesday before climbing back to close at $80.60, down $5.90, or 6.82 percent. More than 15.5 million shares were traded, almost eight times the average daily volume.

When Kerkorian announced on May 22 that he wanted to buy the two large assets, MGM Mirage's stock soared more than 27 percent and continued to rally over the past month. MGM Mirage put a special committee of its board of directors in place to study the offer, and Kerkorian's intentions may have put the whole company into play. The committee was disbanded Wednesday.

"The fact that Mr. Kerkorian pulled his offer does not hurt MGM Mirage's story," said Nollenberger Capital Partners gaming analyst Justin Sebastiano in a note to investors. "In fact, we think it helps it. We believe MGM Mirage is at the top of private equity firms' lists of acquisition targets. Mr. Kerkorian's withdrawal makes an acquisition by another private equity firm a real possibility. We could even see a bidding war ensue, much like what occurred when Aztar Corp. agreed to be taken private in early 2006."

Bear Stearns gaming analyst Joe Greff agreed that MGM Mirage might still have potential buyers.

"Despite the negative reaction to the announcement in the market, we believe this represents a significant buying opportunity, as we find the big picture situation to be largely unchanged," Greff said in a note to investors. "In short, we believe today's announcement makes a sale of MGM Mirage, in total, both easier and more attractive to potential buyers."

MGM Mirage Chairman Terry Lanni said the two announcements could be construed as related, since Kerkorian alluded to MGM Mirage's joint venture potential with Kerzner in Tracinda's one-paragraph statement.

The potential deal with Kerzner would not only bring an international resort developer into Las Vegas, but would also add continued attention on the Strip's northern end.

MGM Mirage will provide the land, valued by the company at $20 million an acre, while Kerzner will contribute cash equity. The project is expected to have a multibillion dollar cost that would be financed through equity contributions and third-party debt, the companies said in a joint statement.

Lanni said the development site is on the northernmost part of a 78-acre parcel, part of which the company acquired in May in two separate land transactions. Kerzner contacted MGM Mirage about the site even before the ink was dry on the purchase agreement.

"They were pretty close to concluding a transaction for another property when they heard about our deal," Lanni said. "They contacted us, looked at the site, and then got in touch with us again 10 days later. This deal greatly enhances the value of the real estate on that part of the Strip."

Lanni said he expected the joint venture with Kerzner to be similar to the company's deal with Boyd Gaming Corp. in the Borgata in Atlantic City. Boyd built and operates the resort while MGM Mirage is the landlord and shares in the profits.

Kerzner International Chairman Sol Kerzner said the company, which is based in both New York and the Bahamas, has been considering entry into Las Vegas for several years. As recently as 2005, when he was honored at International Hotel & Restaurant Show, Kerzner said he was trying to find a location to set up shop.

"We have great regard for MGM and I've known Terry Lanni for a long time," Kerzner said Wednesday. "It made sense for us to do something with MGM and we enjoy creating something out of an undeveloped piece of real estate. No question that this is a far more attractive site than anyone would have thought."

GAMING COMPANIES: MGM shares take a wild ride is republished from