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Best of Liz Benston

Gaming Guru

Liz Benston

Mandalay is Weighing Sweetened Merger Deal

14 June 2004

and Richard N. Velotta

LAS VEGAS -- The biggest merger in casino industry history may be back on.

MGM MIRAGE said today it reached an agreement with top executives of fellow casino operator Mandalay Resort Group on the fundamentals of a sweetened deal in which MGM MIRAGE would buy Mandalay for $7.9 billion, or $71 per share. That's $3 per share higher than MGM MIRAGE's initial offer that was rejected Friday.

Mandalay management said its board will consider the offer Tuesday. It cautioned, there are "no assurances that a definitive agreement will be reached."

MGM MIRAGE shares were down 1.3 percent to $46.99 in early trading today while Mandalay shares fell 1.2 percent to $67.60 amid a broader market downturn. Analysts said they had expected Mandalay to trade up on the $71 per share offer.

One analyst said Mandalay's stock price fell on concerns that MGM MIRAGE may be unwilling to sell assets if required by regulators.

Regulators may demand that a combined company sell a casino in Las Vegas or one of its two Detroit operations, Deutsche Bank analyst Marc Falcone said.

"The market is defining some form of regulatory risk related to the transaction," Falcone told Bloomberg News, adding that he thinks the purchase will be completed. "A lot of the critical issues of the transaction have been agreed upon by management on both sides."

The news comes just three days after Mandalay rejected MGM MIRAGE's $68 per share offer of $7.65 billion.

MGM MIRAGE officials today declined further comment and Mandalay officials could not be reached for comment.

On Friday Mandalay said the deal on the table at that time was rejected in part because of an MGM MIRAGE demand that Mandalay shareholders accept the risk that regulators would kill the deal or require major asset sales because of antitrust law.

Mandalay said the proposal at that time would have given MGM MIRAGE an effective stranglehold on Mandalay's operations by giving MGM MIRAGE the option of terminating the deal after 15 months while antitrust regulators decided whether any casinos would need to be sold.

A source familiar with the negotiations, who declined to be named, said this morning that the new offer drops those terms and shifts regulatory risk to MGM MIRAGE shareholders.

"The bottom line is that we've become increasingly comfortable that the combined company is going to comply with all rules and regulations," the source said.

The combined entity anticipates holding on to its acquisitions given recent industry changes, especially the growth of gambling in California, the source said.

"The fact of the matter is that the gaming industry has changed dramatically in the last 15 years and we're on the precipice of another wave of major changes with regard to California. If Nevada is going to maintain its rightful role as the gaming capital of the world, the industry has to evolve into companies like this, companies that are able to compete with gaming jurisdictions evolving around the country."

The buyout would create a behemoth with 29 casinos in several states including 12 major casinos stretching from one end of the Las Vegas Strip to the other, ranging from the budget-conscious Circus Circus Las Vegas to the high-end Bellagio. Initial projections said the combined entity would generate some $7.5 billion in annual revenue -- at least $3 billion higher than the estimated 2004 revenue of the companies' global competitors Harrah's Entertainment Inc. and Caesars Entertainment Inc.

While analysts say the combined company would likely prefer to hold on to its acquisitions, they disagree on whether state or federal regulators would require the sale of any Nevada casinos. Since both companies would own Detroit casinos, it's likely that one would have to be sold under the rules in that market, analysts say.

Regulators are expected to require the sale of "noncore properties" from both companies, potentially including Treasure Island on the Strip, MGM MIRAGE's Primm casinos or Mandalay's casinos in Jean, CIBC World Markets gaming analyst William Schmitt said in a research note today.

But Fulcrum Global Partners analyst Joe Greff said in a separate report that regulators might not force the companies to sell Las Vegas assets though the entity would control an estimated 50 percent of rooms on the Strip.

Hours after Mandalay spurned the deal Friday, industry observers speculated that MGM MIRAGE wouldn't give up and that majority shareholder and aggressive dealmaker Kirk Kerkorian would continue to pursue the company. Analysts this morning said they weren't surprised by the higher offer.

"We did not think the deal was completely dead given our belief that (Mandalay) was a willing seller and the likelihood that more negotiations needed to take place given the transaction's complexity," Falcone said today in a research note. "The timing was a bit faster than we would have thought."

If closed, the deal is expected to add from 10 cents to 15 cents in annual earnings per share for MGM MIRAGE if the combined company sells its 53.5 percent ownership in the MotorCity Casino in Detroit and is able to raise at least $1.5 billion in equity financing, Falcone said.

In a statement today, MGM MIRAGE said negotiators for the companies "have agreed on all material terms" of a new all-cash offer.

The offer includes $2.5 billion in Mandalay debt. The deal is expected to be immediately profitable to MGM MIRAGE, MGM MIRAGE officials said.

In a separate statement shortly after the MGM MIRAGE announcement, Mandalay said the terms of the proposal "offer significantly greater assurances of closing." Mandalay officials could not be reached this morning for further comment.

Some analysts this morning said the deal looks likely and makes financial sense.

Greff said in a research note that the $71 per share offer "is in the zone to get the deal done" and that regulators might not force the companies to sell assets in Las Vegas even though the combined entity would control an estimated 50 percent of rooms on the Las Vegas Strip.

Other bidders for Mandalay also are unlikely to merge, he said.

UBS Warburg gaming analyst Robin Farley this morning upgraded a rating on MGM MIRAGE shares to "buy" from "neutral," saying the acquisition could boost the company's annual earnings even higher than Falcone's estimate. Her estimate is 45 cents per share in incremental annual earnings. The deal should allow MGM MIRAGE to reduce expenses, while an influx of cash flow from Mandalay should help MGM MIRAGE offset a potential drop in earnings next year as the company's high-end properties face stiff competition from the upcoming Wynn Las Vegas resort, Farley said in a research note.

Bear, Stearns & Co. bond analyst John Mulkey said in a separate report that Mandalay is likely to approve the proposal and that "any antitrust concerns would most likely modify the acquisition rather than scuttle it."

MGM MIRAGE is likely to aggressively reduce debt ahead of the closing of the deal to minimize or eliminate the need for new equity to finance the purchase, Mulkey said.

At a Gaming Hall of Fame dinner presented by the American Gaming Association in Henderson Friday evening, the subject of the potential deal was conspicuously absent from the public presentations.

The dinner honored former MGM Grand Inc. Chairman and Chief Executive Officer Fred Benninger -- a longtime friend and colleague of Kerkorian -- comedian Don Rickles and Horseshoe Gaming Holding Corp. Chief Executive Officer Jack Binion.

Privately, however, gaming insiders said both the MGM MIRAGE offer for Mandalay and its subsequent rejection caught them by surprise and that they were anxiously awaiting the companies' next moves.

"I had no idea the deal was coming and I'm a little surprised it didn't happen," Harrah's Entertainment Inc. Chief Executive Officer Gary Loveman said. "We're just waiting to see what develops."

Tim Hinkley, president and chief executive of Isle of Capri Casinos Inc., said speculating about the deal has "almost become kind of a sport right now."

"We're just watching," Hinkley said when asked about whether his Biloxi, Miss.-based company, which operates riverboat casinos, would be interested in buying assets or otherwise getting involved in the action. "We've got enough going on to keep busy at the moment."

In rejecting MGM MIRAGE's offer Friday, Mandalay Resort Group President and Chief Financial Officer Glenn Schaeffer said the offer gave MGM MIRAGE control over whether the deal would close and that Mandalay would be "restrained in our operational and financial conduct" for 15 months while regulators reviewed the deal.

Price wasn't what killed the talks, Schaeffer said Friday.

But Jane Pedreira, a bond analyst with Lehman Brothers, said Mandalay's rejection of the offer conveniently "sidestepped price" as a central issue.

Mandalay is on the cusp of an upswing and management no doubt believes the company is worth more than $68 per share, she said.

Mandalay has only reported one quarter of results so far from its new hotel tower at Mandalay Bay and its high-performance convention center has only been open for about a year and a half.

"I'd like to see one more quarter of earnings before I saw them sell." Pedreira said. "One quarter is not enough to figure out what earnings track they're on (for fiscal 2005)."

Analysts had speculated last week that price was a primary sticking point of the negotiations and that Mandalay, fresh from reporting its most profitable quarter in history, should press for more money.

MGM Grand Inc. didn't win over Mirage Resorts Inc. so easily, instead engaging Mirage's majority owner Steve Wynn in a lively, back-and-forth negotiating exchange, they said.

Should the merger fail, another potential next step surfaced in a report posted on the Internet on Sunday. In the online version of the Wall Street Journal, the publication cited sources close to Mandalay as weighing a move to accelerate its development of its next Strip resort.

The Journal said when Mandalay's board rejected the MGM MIRAGE bid in a two-hour meeting Friday, Mandalay executives discussed plans to strike back with a new resort designed to steal market share from their suitor.

The new resort -- the so-called "Project Z" development -- would be built on the northwestern corner of the intersection of Russell Road and Las Vegas Boulevard. In an interview with the Las Vegas Sun earlier this year, Schaeffer said construction on the resort, which would be attached to Mandalay Bay and share its amenities, wouldn't begin this year.

But the Journal's source said the beach-themed property, which would have a $700 million construction budget, could be built early next year instead of by late 2005 or early 2006. Mandalay officials couldn't be reached for comment.

Employees at Mandalay properties on Sunday had not yet heard news of a higher offer and had mixed reactions to Mandalay's rejection of the initial offer last week.

"I'm glad it didn't go through," said Diana Taylor, a 19-year employee at the race and sports book at the Circus Circus hotel-casino. "I don't like change."

Taylor said she considered changing properties when the Excalibur, Luxor and Mandalay Bay properties opened, but she decided to stick with Circus Circus because it was comfortable to her.

"Some of the younger employees weren't too worried about it, but I'm a little over a year away from retirement," Taylor said. "When somebody new comes in, and you're not (a member of the) union, you don't know whether you'd have to reapply for your job."

Taylor said several rumors were swirling around employee circles, including talk that an MGM MIRAGE buyout could include tearing down the 34-year-old Circus Circus to make room for a new megaresort on the north end of the Strip in the neighborhood of Steve Wynn's new property and Sheldon Adelson's new resort adjacent to his Venetian.

Meanwhile, up the Strip, Carl Ciadella, a bartender at the lounge at the new hotel tower at Mandalay Bay, said he, too, was glad Mandalay management rejected the MGM MIRAGE offer, even though he felt his job wasn't in jeopardy no matter what happened.

"For bartenders and cocktail servers, there are still going to be jobs," Ciadella said. "No matter who owns it, they have to have somebody serving drinks."

Casino-resort developer Steve Wynn declined comment on the pending deal today, except to say that he was waiting to see what Gov. Kenny Guinn and Nevada state officials have to say about the plan.

"I'm real curious about what the state of Nevada and the governor have to say," Wynn said.

State officials are predictably quiet on the matter.

"Until it's all completed, we really can't comment on anything," said Greg Bortolin, a spokesman for Guinn. "It's just not appropriate for us to comment, yet."

Peter Bernhard, chairman of the Nevada Gaming Commission, had a similar response.

"I really can't comment simply because it is a matter that will come before us," he said. "As decision makers, we need to make sure we have all of the information before we make any comments."

Sun reporters Kevin Rademacher and Jeff Simpson contributed to this report.

Mandalay is Weighing Sweetened Merger Deal is republished from