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Liz Benston

MGM Mirage in Deal to Build Casino in China

21 June 2004

Fresh from engineering the biggest gaming acquisition in history, MGM MIRAGE today said it entered into a joint venture to build and operate a major resort in the Chinese city of Macau, one of the most lucrative gambling markets in the world.

MGM MIRAGE announced a deal with Pansy Ho Chiu-king, the daughter of Macau casino boss Stanley Ho, to develop a hotel-casino in the coastal Chinese city near Hong Kong. The company would join Las Vegas operators Las Vegas Sands, which owns the Venetian hotel-casino, and Wynn Resorts chief Steve Wynn in running Macau casinos.

The hotel-casino, which is expected to open by late 2006, will use the MGM Grand name. It would be on a waterfront site next to Wynn's planned hotel-casino and near Stanley Ho's Lisboa hotel-casino.

The projected cost and other details of the project weren't available this morning, though some analysts estimated a cost of about $400 million to $700 million.

Las Vegas Sands owner Sheldon Adelson, Wynn and Stanley Ho won casino concessions in 2002 to operate in Macau, breaking the decades-old monopoly that Ho had on casinos in the former Portuguese colony. Macau, which reverted to Chinese rule in 1999, remains the only place in China where people can gamble legally in casinos although other forms of gambling are popular in Hong Kong.

Ho's 12 casinos generated more than $3 billion in revenue in 2003. With Las Vegas Sands' May 18 opening of its $240 million Sands Macau casino -- the first opening by an American company -- the market will now generate some $4 billion in revenue, analysts say. By contrast, gambling revenue for the Las Vegas Strip totaled just over $5 billion for the 12 months ended April 30, according to recent state figures.

MGM MIRAGE spokesman Alan Feldman said the partnership will give the company a foothold in an "extraordinary" market that is expected to develop into a "more broadly defined tourist destination" in close proximity to millions of potential customers in mainland China. The company, which had lost out to Wynn and Adelson for casino licenses in 2002, has been in talks with Pansy Ho for several months.

The ability to cross-market MGM MIRAGE's Las Vegas casinos in Macau is expected to be a secondary benefit of the deal rather than a primary goal, Feldman said.

"Looking at it longer term, it's possible there may be some synergies between Macau and Las Vegas but I think that's something that will only develop over time after people experience what Macau has to offer," he said.

The agreement is subject to the approval of the Macau government as well as other regulatory approvals. The resort would operate as an independent entity under the terms of a subconcession agreement with Stanley Ho's company, Sociedade de Jogos de Macau.

Fulcrum Global Partners gaming analyst Joe Greff said the casino project is "more offensive than defensive" because it is expected to generate high returns for MGM MIRAGE.

Macau's gambling revenue is growing at a 25 percent clip and is expected to continue to grow by about 25 to 30 percent over the next couple of years in part because the Chinese government has more recently granted more travel visas to Macau, Greff said. Chinese visitors from the mainland are required to have visas to travel to the province.

A $500 million investment in Macau could generate a 40 percent return and add about $3 in incremental value to MGM MIRAGE shares, he said.

"Even without the cross-marketing opportunity, it's a smart move to get into that market," Greff said.

Deutsche Bank Securities gaming analyst Marc Falcone said the location of the planned casino next to others "should create the first area of critical casino mass in Macau" and "one of the leading attractions" in the city.

But Nevada regulators in particular are expected to take a hard look at the deal because it involves a joint venture with a Macau operator, he said.

Prior to the changeover to Chinese rule in 1999, Macau's triad gangsters routinely killed one another and critics say their businesses catering to casino customers of loan sharking, bookmaking and prostitution remain active.

The additional competition could be a "small negative" for Wynn, UBS Warburg analyst Robin Farley added.

In a research note today, Farley lowered estimated daily revenue per table game at Wynn's upcoming resort by about 10 percent, to $16,000, on the news.

Last month the government of Macau passed legislation allowing casinos to extend credit to high-rollers in the form of gambling chips and also enforce gambling debts. Following that news, Wynn Resorts Ltd. this month announced plans to build a larger resort in Macau than anticipated. Wynn said his project would cost $705 million and feature 600 hotel rooms, restaurants and retail areas. Analysts said they expected MGM MIRAGE to announce a partnership in the wake of that legislation.

In agreeing last week to buy Mandalay Resort Group for $7.9 billion, including debt, MGM MIRAGE officials said the combined entity would have greater access to capital in order to expand in Las Vegas as well as abroad. The company is eyeing opportunities across the Far East as well as in the United Kingdom, where it has struck joint venture partnerships.

Unlike Macau, which has few limits on gambling and dwarfs Las Vegas in table game action, Great Britain is still awaiting legislation that would lift restrictions in a number of areas, including the number of casinos and slot machines that can be offered in that country. Analysts have recently expressed concerns that the company's partnerships in Britain could be less lucrative than expected because of potential delays in legislation and more gambling limitations than initially envisioned. MGM MIRAGE officials have said that they remain bullish on the United Kingdom and their expectations haven't changed.

Feldman said this morning that the company "is working just as hard on U.K. opportunities as ever," though the financial scope of those projects has yet to be determined. Both Great Britain and Macau "have the potential to be exceptionally vibrant markets," he said.