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Best of Howard Stutz

Gaming Guru

Howard Stutz

MGM Mirage-Mandalay Merger: Buyout Gets Control Board's OK

23 February 2005

LAS VEGAS -- MGM Mirage's $7.9 billion buyout of the Mandalay Resort Group moved a step closer to completion Tuesday as Nevada gaming regulators granted preliminary approval to the creation of a 28-casino company that will employ more than 75,000 workers, 90 percent of whom will be based in Nevada.

With the State Gaming Control Board's 2-0 recommendation, the proposal now moves to the Nevada Gaming Commission on Thursday. The commission's five members sat through Tuesday's two-hour hearing at which MGM Mirage executives and their attorneys spelled out the company's plans.

Mark Clayton, the control board's newest member and a former Caesars Entertainment executive, recused himself from deliberating on the merger because of his former company's pending $9.4 billion purchase by Harrah's Entertainment.

MGM Mirage controlling shareholder Kirk Kerkorian attended the control board hearing at the invitation of the regulators. He briefly addressed the board and left the hearing right after the vote.

In a short interview, Kerkorian said the Mandalay properties would be a good fit within the MGM Mirage portfolio.

"I always felt, going way back, that the future of Vegas was unlimited," said Kerkorian, who began MGM Mirage with the construction of the 5,000-room MGM Grand in 1993. "They match up very well with our company. We're a buyer, but we're also a developer."

MGM Mirage Chairman Terry Lanni said the expected final approval by the commission could allow the transaction to close in as soon two weeks, almost a month ahead of the timetable set by company executives when the merger was announced last July.

Lanni said after Nevada regulators' consent, just two issues remain outstanding: The company must complete the sale of one of its two Detroit-area casinos in order to satisfy Michigan gaming law, and it must place Mandalay's Illinois casino into an escrow trust because that state doesn't have a full compliment of gaming regulators to rule on the matter.

"We're comfortable we'll be able to resolve the issue in Illinois, and we have multiple opportunities in Michigan, and we'll accept the offer that closes the earliest," Lanni said.

MGM Mirage executives said financing for the merger is in place, which would include the purchase of $4.8 billion of Mandalay Resort Group stock at $71 a share and the assumption of almost $3 billion in company debt.

The hearing delved into whether MGM Mirage would have an unfair advantage over its competitors once the merger is finalized. The company would operate 12 of the 41 casino properties on the Strip. Combined, the companies would have produced $7.3 billion in revenue last year.

In statistics presented to the control board, the company stated its combined operations would not give it an unfair advantage.

Attorney Ellen Whittemore told the board the merged company will control 39.3 percent of the Strip's slot machines; 41.2 percent of the Strip's table games, including blackjack and craps; and 55.2 percent of the Strip's poker tables. It also will account for 42.9 percent of the Strip's gross gaming revenue and 57.4 percent of the Strip's live entertainment tax.

Based on current levels, the merged company will control 49 percent of Strip's hotel rooms, but Whittemore said that figure will drop to 36.6 percent when approximately 30,000 proposed casino hotel room additions are figured into the mix.

Attorneys and MGM Mirage executives said the state gaming regulation governing anti-competition may be out of date, since it was written in 1968, when legalized gaming in the United States was found only in Nevada.

Today, MGM Mirage and other Nevada casino companies face competition throughout the country, including 56 American Indian casinos in California.

"When you look at the competitive landscape, not only does MGM Mirage compete against other companies, we compete against ourselves," MGM Mirage President and Chief Financial Officer Jim Murren said. "All our properties have been empowered to retain their identities and their individualism, and the presidents are compensated based on results."

In the end, after pouring over four separate reports looking into the merger, including a six-month investigation by state gaming agents and last week's decision by the Federal Trade Commission not to challenge the deal, control board members were satisfied the merger won't adversely affect other casinos.

"I don't think the merger creates enough possibilities where I would be concerned," said control board Chairman Dennis Neilander. "The company has developed a bundle of products that includes hotel rooms, entertainment, gaming, food and beverage, and convention business. I believe their business plans are well laid out and well thought out, and at the end of the day, you're going to have a very strong company. From a business and financial perspective, the company has clearly met the burden."

During their presentation, MGM Mirage executives gave a preview of how the company will appear, post-merger. Mandalay's 17 properties would be divided into the company's two operating arms -- Mirage Resorts headed by Bobby Baldwin and MGM Grand Resorts headed by John Redmond. "We didn't believe a third operating arm is needed," Lanni said.

He added that property presidents would be named after Thursday's gaming commission action.

Lanni told regulators the company's goal has been to operate the Mandalay properties, saying their varied customer base gives the company a foothold into all sectors of the gaming market.

Lanni empathized with Mandalay's 35,000 employees, who have been awaiting the merger's outcome.

Attorneys limited MGM Mirage's contact with its future work force, but Lanni's goal is to meet with employees at each Mandalay resort once the transaction is finalized.

"We've got to end that uncertainty," Lanni said. "Judge us by our actions following the Mirage transaction (in 2000). Most of the corporate level people have already told us they were leaving, but we're hoping the vast majority of employees will remain. Many of the Mirage employees ended up in high-level positions with our company.

Lanni did say during a break in the hearing, however, that most of Mandalay Resorts' top executives would leave once the deal is completed.

Murren also gave regulators a taste of MGM Mirage's planned $4.7 billion Project CityCenter, which will include 18 million square feet of construction, including a 4,000-room hotel-casino, three 400-room nongaming hotels, 550,000 square feet of retail, dining and entertainment and 1,650 residential units. The project would provide 7,000 construction jobs and 12,000 permanent positions.

Murren said planning for the project would be done over 2005 and 2006, with construction expected to begin in earnest in 2007. Neilander said the company's commitment to Nevada was evident in the presentation.

"When we weigh the public policy in this state, I think it's important to take that into account," Neilander said. "MGM Mirage has geographic diversity, but it continues to reflect a strong investment in Nevada."

Mandalay shares rose 2 cents to close at $70.68 on the New York Stock Exchange Tuesday. MGM Mirage shares fell $3.45, or 4.4 percent, to finish at $75.05 on the NYSE.

MGM Mirage-Mandalay Merger: Buyout Gets Control Board's OK is republished from