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Best of Liz Benston

Gaming Guru

Liz Benston

Mandalay Shares Soar After Takeover Bid

7 June 2004

Mandalay Resort Group shares soared 20 percent this morning after news late Friday that MGM MIRAGE offered to buy Mandalay for $68 per share, or $7.65 billion.

Shares rose about $12, or about 20 percent, to $72.26 in early trading today after rising more than $5, or about 12 percent, Friday on strong earnings news.

The offer, which includes $2.8 billion in debt, has been on the table since Wednesday, MGM MIRAGE representatives said. It is being taken seriously by Mandalay executives, according to people close to the negotiations. In a statement Friday, Mandalay executives said the company would "carefully evaluate the proposal."

Mandalay President and Chief Financial Officer Glenn Schaeffer and MGM MIRAGE officials could not be reached for comment this morning on the offer.

The proposed merger, which would top the $6.4 billion that MGM Grand Inc. paid for Mirage Resorts Inc. in 2000, would create the world's largest casino empire with 29 casinos, nearly $7.5 billion in annual revenue and $2 billion in annual cash flow.

It also would create a unique concentration of wealth, with 12 Las Vegas casinos of nearly every price range and amenity stretching for nearly 3 miles along the Strip between Russell and Spring Mountain roads. MGM MIRAGE would acquire thousands of rooms at a lower price range as well as the Mandalay Bay Convention Center, a 1.8 million square foot wonder that has largely driven Mandalay's earnings growth over the past year. With the addition of Mandalay Bay and the property's new hotel tower, the combined company also would dominate the high end market, with an array of fine restaurants, shows and nightclubs.

The deal is far from final, analysts said. MGM MIRAGE will likely have to cough up more money to buy a company that just reported its most profitable quarter in history and MGM MIRAGE might be required to sell off some of its casinos to appease state and federal regulators. MGM MIRAGE already carries some $5 billion in debt and would probably need to sell properties or offer some of its own stock as part of the deal, analysts said. Also, competitors could enter the fray at the last minute to woo Mandalay, analysts said.

Some potential suitors include Caesars Entertainment Inc. and Harrah's Entertainment Inc., which face similar challenges as other gaming companies to grow earnings in a country with limited potential for establishing commercial casinos in new markets, analysts said. Casino bosses Steve Wynn and the Venetian's Sheldon Adelson also could finance such a deal, they said. Wynn's company has created more than $3 billion in market capitalization before earning a dime and Adelson could take his company public to raise cash, they said.

Other gaming stocks rose early today, with analysts speculating that the potential mega-merger could spawn consolidation across the industry.

Shares of Caesars Entertainment rose 5.3 percent to $14.87, Harrah's Entertainment shares increased 2.1 percent to $53.53, Wynn Resorts Ltd. rose 1.3 percent to $43.13, Boyd Gaming Corp. rose 5.7 percent to $25.33 and Station Casinos Inc. rose 1.9 percent to $49.04. Shares of MGM MIRAGE fell half a percent to $45.80.

Harrah's Entertainment Inc. spokesman Gary Thompson declined to comment on the company's potential interest in Mandalay.

"Right now we are focused on completing the acquisition of Horseshoe Gaming, which we expect to occur by the end of the month, and then integrating those properties into our portfolio," Thompson said. Harrah's Chief Executive Gary Loveman has indicated that the company intends to build future projects in both Las Vegas and Atlantic City, which both have strong growth potential, he said.

Venetian spokesman Ron Reese also declined to comment on the offer. But sources close to the company said that a buyout of Mandalay "was not in the cards" for Venetian owner Las Vegas Sands Inc.

"Everybody looks at every potential deal out there," according to another industry source who declined to be named. Instead of making a counter-offer, gaming companies might instead wait to buy up individual casinos that MGM MIRAGE might be forced to sell if the deal goes through, the source said.

Wynn said this morning he was surprised by the offer and speculated that MGM MIRAGE's controlling shareholder Kirk Kerkorian was feeling restless and decided to shake things up.

"Don't worry, be happy. Life is gonna be great in Kirkville," he said.

Culinary Union Local 226 Secretary-Treasurer D. Taylor said today he doesn't expect the relationship between the union and the companies would change much if the merger were approved.

"It's just the further consolidation of the industry and I expect to see more of these types of mergers," Taylor said.

Asked if the merged company would represent a tougher negotiator in future contract talks, Taylor said, "I really don't know."

Taylor said the Culinary represents about 22,000 employees between the two companies and contracts are in place for both companies through May 2007.

Mandalay has hired the New York law firm Cravath, Swaine & Moore, which has expertise in merger and acquisitions, and has retained investment banking firm Merrill Lynch to advise the company in the negotiations, according to people close to the deal.

In a letter distributed early today, MGM MIRAGE Chief Executive Officer Terry Lanni said the company met with Mandalay executives and financial advisers Wednesday to discuss a possible merger. The offer, which represents a premium of 12.8 percent over Mandalay's closing share price of $60.27 on Friday and a 22.6 percent premium over the closing price of $55.48 on June 2, will expire Tuesday at 5 p.m., Lanni said.

"Our intention has always been to accomplish the combination of our two companies on a friendly basis," the letter read. "We are concerned that the trading activity in Mandalay's stock strongly suggests that there has been a leak of the negotiations. Under applicable securities laws, Mandalay and we have a legal obligation to disclose such negotiations if there has been a leak."

Analysts said MGM MIRAGE went public with its offer late Friday in a likely attempt to stabilize Mandalay stock after Mandalay reported record profit in its first quarter ended April 30.

"MGM wanted to move quickly before (Mandalay stock) got up any higher," Lehman Brothers bond analyst Jane Pedreira said.

But analysts say MGM MIRAGE's offer is low compared to their revised stock price targets that are now as high as $80 per share.

"I would expect Mandalay to play hard to get," Jefferies & Co. bond analyst Ray Cheesman said.

UBS Warburg analyst Robin Farley wrote in a research report today that MGM MIRAGE might be willing to raise its bid by another 5 to 10 percent to $72 to $75 per share. The deal would still add to MGM MIRAGE earnings at those higher prices, she said. Fulcrum Global Partners analyst Joe Greff noted today that MGM MIRAGE could afford up to $81 per share.

Mandalay makes an attractive takeover target because profit is growing rapidly and because the company isn't spending much on future projects, meaning that MGM MIRAGE can use its cash to immediately lower the debt it would accumulate in the deal, analysts say.

"Big companies need big things to grow earnings," Cheesman said. "You can do it one deal at a time or you can take one big bite of the apple."

MGM MIRAGE is facing stiffening competition on every front, Pedreira said.

"For a long time they had the benefit of (having) the premier high-end property," she said. "But Mandalay is taking a bite out of their convention business and the Venetian is taking a bite out of their high end business. Steve Wynn is going to compete for that high end business and Venetian is adding a second phase. If they don't do something their earnings are going to be hit next year."

While MGM MIRAGE is a favorite on Wall Street because of its high profile assets and earnings stability, Mandalay has more recently become something of a Wall Street darling because of stellar returns driven largely by its Mandalay Bay Convention Center, which opened in January 2003.

After Mandalay's earnings announcement Friday, 13 of 25 stock analysts who follow the company upgraded their earnings estimates. Of the 25 analysts, 17 of them have "buy" recommendations on Mandalay -- more than any other major gaming company.

Two of those analysts downgraded their ratings on Mandalay this morning based on the stock's rapid increase.

"The current trading level of $72 is an attractive risk-return balanced exit point," Deutsche Bank Securities analyst Marc Falcone said. "The stock is up 30 percent plus since last Wednesday ... and we don't think there is much additional upside from here."

Analysts zeroed in on the company's cash flow -- a key indicator generally defined as earnings before taxes, depreciation and amortization -- as a sign of things to come. The company reported cash flow of $234.7 million, which puts the company on track to blow past its projected $700 million in cash flow for fiscal year 2005, analysts said.

MGM MIRAGE owns more Strip casinos than any other company, including Bellagio, MGM Grand, The Mirage, Treasure Island, New York-New York and the Boardwalk. Mandalay Resort Group owns Mandalay Bay, Luxor, Excalibur and Circus Circus Las Vegas. Both companies own a half interest in the Monte Carlo casino.

The companies' interests also overlap in Detroit and near the California border in Nevada. MGM MIRAGE owns MGM Grand Detroit and Mandalay has a majority interest in the MotorCity Casino in Detroit, where regulators required that different companies own each of the city's three casinos. MGM MIRAGE owns three hotel-casinos -- Buffalo Bill's, Primm Valley Resort & Casino and Whiskey Pete's -- in Primm. Mandalay owns the Gold Strike and Nevada Landing hotel-casinos in nearby Jean. MGM MIRAGE owns the Beau Rivage in Biloxi, which is about 380 miles south of Mandalay's Gold Strike casino in Tunica, Miss. MGM MIRAGE recently sold off its interests in the Golden Nugget casinos in Las Vegas and in Laughlin, where Mandalay owns the Colorado Belle and Edgewater casinos.

Mandalay Shares Soar After Takeover Bid is republished from