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Consolidation in the Gaming Industry: What will be the Follow-Up Act to MGM Grand and Mirage?

David Anders, analyst with CS First Boston, believes Harrah's Entertainment would be a logical buyer of Mandalay Resorts Group. The Mandalay portfolio would benefit from being rolled into Harrah's "Total Gold" national marketing program, Anders said.

Moreover, Harrah's would be far more likely to pass antitrust scrutiny as a buyer of the Mandalay portfolio. A combination of Harrah's and Mandalay would control roughly one-third of the Strip's hotel rooms and casino space -- larger than any other company, but not tremendously larger than its competitors.

"Obviously, the projects that would benefit most from Harrah's ... would be Mandalay Bay and Luxor," Anders said. "But Circus Circus and Excalibur continue to be nice cash flow generators. As long as you don't overpay for them, (Harrah's) wouldn't necessarily have to sell them out of the portfolio."

Robin Farley, gaming analyst with Deutsche Banc Alex. Brown, believes Harrah's could offer as much as $20 per share for Mandalay -- a 44 percent premium over current prices -- and still immediately boost its earnings.

However, she noted, "Harrah's rate of same-store cash flow growth tells us that Harrah's does not need to buy Mandalay."

Other companies are being bandied about as possible targets for Park Place and Harrah's. One potential combination that Jason Ader, senior managing director at Bear Stearns & Co., believes is a strong possibility is a Harrah's buyout of Station Casinos Inc.

"They have a franchise you can't duplicate," Ader said. "(The Las Vegas locals) market is growing faster than any other market in the industry. Harrah's could buy it for the foothold into the Las Vegas market.

"Harrah's is a perfect strategic buyer for that company."

Another attraction for Harrah's would be solidifying its customer base in Missouri. Harrah's operates one of four casinos in the Kansas City market -- and its Kansas City casino vies with Station's Kansas City property for the title of largest-grossing property in the area. Acquiring Station would give it well over 50 percent of the increasingly lucrative Kansas City market, if such an acquisition could survive antitrust concerns there.

Station is trading just north of $19 a share, roughly the middle of its 52-week price range.

Harrah's, after failing to launch an official counterbid for Mirage Resorts, may also try to convince MGM Grand to part with one of the company's Strip properties, said Dave Ehlers, chairman of Las Vegas Investment Advisors.

"Why not acquire the Mirage (hotel-casino) from MGM Grand?" Ehlers said. "That would make the most sense."

One smaller company being eyed closely on Wall Street as a buyout waiting to happen is Aztar Corp. Though its stock is not depressed, the Phoenix company has two valuable assets a buyer would crave -- a position on one of the most valuable intersections on the Strip in the Tropicana hotel-casino and a strong-performing Atlantic City asset in the Tropicana Atlantic City.

"(The Tropicana) is at a great location in Las Vegas," Ader said. "My sense is that's something on people's radar screen. The question is, do they want to remain independent or not? If not, there would be some companies who are interested."

Anders also believes Aztar is a strong buyout candidate, but isn't sure who would be ready to pounce. Instead, he suggested the best route may be a merger with another strong acquisition target - Argosy Gaming Inc. of Alton, Ill.

By merging, the companies could form a powerful competitor to the Big Five, with strong properties in Atlantic City and near Cincinnati, riverboats in St. Louis, Kansas City and Baton Rouge, La., and a long-term development opportunity on the Las Vegas Strip, Anders said.

"I'm not sure which one would buy the other, but you'd start to create the foundation to create a significant gaming company," said Anders, who upgraded Argosy to "strong buy" Friday. "That's my top pick."

In theory, Boyd Gaming Corp. is also seen as an attractive buy. Its stock is down 29 percent from its 52-week high, and its casinos include the Stardust on the Strip, Sam's Town on the Boulder Highway, and three downtown Las Vegas properties.

But the reason many analysts discount the possibility of a takeover is the chairman and chief executive of the company, William Boyd. Boyd controls more than 50 percent of his company's stock, so he could single-handedly block any suitor.

"Bill Boyd would have to want to sell," Ader said. "He has de facto control."

Still, one possibility does remain for Boyd -- a move to take the company private, as Sun International is doing, Anders said.

"The market is not giving you any credit for growth opportunities ... perhaps it's just better to go private," Anders said. "They do not need access to the public market, and it's a reasonable transaction as well."

Although merger speculation is expected to continue for some time, Ehlers noted that the pool of potential hunters is starting to shrink quickly. The top three candidates -- MGM Grand, Park Place and Harrah's -- are now all busy digesting earlier acquisitions, Ehlers said.

"The number of players is fading," Ehlers said.

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