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MGM Grand in Pursuit of Mirage: Will Other Las Vegas Heavies Also Take a Shot?

For MGM Grand, the Mirage Resorts bid would be an opportunity to create a 900-pound gorilla on the Strip, with a huge share of the high-end market. The "financial might" of MGM-Mirage, as MGM Grand President Jim Murren has called it, would make it extremely difficult for competitors to catch up.

Robin Farley, gaming analyst with Deutsche Banc Alex. Brown, estimates the combined company would produce annual cash flow of $1.1 billion, plus as much as $100 million in annual cost savings, "to say nothing of asset sales and the fact that MGM could use funds that Mirage has earmarked for Atlantic City and the Bellagio expansion to pay down debt."

"Larger companies get better pricing when they borrow money, and higher price-earnings multiples on Wall Street," said Shannon Bybee. "If you've got a public company, you've got to grow. The easiest way to grow in this industry is to buy someone else." Bybee is executive director of UNLV's International Gaming Institute.

But that factor -- that the Strip's other major players simply can't afford to let MGM Grand swallow Mirage Resorts -- may force the Strip's other major companies to enter the fray, should MGM Grand and Mirage Resorts begin dealing.

"(Competitors) have to think hard about it, especially if (Mirage Resorts) is about to disappear," CS First Boston analyst David Anders said. "If MGM ends up with it, those assets are gone."

Harrah's is the most widely discussed competitor for Mirage Resorts, given the company's lack of a large presence on the Strip, and its need for a high-end portfolio. Another significant factor is Wynn's friendship with Harrah's Chief Executive Phil Satre -- raising the possibility if Wynn seeks a white knight, he would approach Harrah's.

Bill Eadington, director of the Institute for Gambling and Commercial Gaming at the University of Nevada-Reno, believes a deal with Harrah's might actually make more financial sense than MGM Grand.

"You expect symbiotic interactions (in mergers)," Eadington said. "In many respects, (MGM Grand and Mirage Resorts) are somewhat redundant. They are top-end companies, with a strong understanding of the high-end market. They don't complement as much as replicate each other."

Harrah's and Mirage Resorts, on the other hand, makes strong strategic sense, Lehman Bros. analyst Stuart Linde said.

"(Harrah's) is interested in acquiring additional Las Vegas Strip capacity and has been considering an expansion at the Rio," Linde wrote. "Buying (Mirage Resorts) also gives (Harrah's) entry into the Mississippi Gulf Coast. We believe that strong strategic reasons exist for a Harrah's-Mirage Resorts combination."

Park Place is seen as less of a possibility, since it is trying to digest its $3 billion purchase of Caesars World Inc. Another factor, observers say, is the rivalry between Wynn and Park Place Chief Executive Arthur Goldberg.

Still, analysts and observers insist Park Place cannot be totally dismissed.

"Any acquisition-oriented gaming company has to come out of the woodwork," Jason Ader of Bear Stearns said on cable network CNBC Friday morning. "You've got to believe Arthur Goldberg is checking this out."

Eadington agreed.

"Park Place has been the most aggressive company in acquisitions," Eadington said. "They certainly would look at it, because it's in their nature to acquire. They haven't stayed out of the game in the past. They'd be one of the players, I would expect."

There is a third option, albeit an extremely risky one.

"One scenario in these situations is taking the company private through an LBO," Farley said. "But that would require a sizable partner to contribute equity."

In an LBO, a group of investors offers to acquire all of a company's outstanding stock, removing it from the public markets. To finance such a transaction, the group takes out a massive amount of debt, using the assets of the target company as collateral.

The most attractive feature to Wynn with an LBO is that it would allow him to retain control of Mirage Resorts, and it would end any need to deal with Wall Street.

But the price would be extremely high; Wynn would need to offer at least $20 a share, analysts say. Moreover, the board would be compelled to consider all counterbids for the company.

In order to sell the bonds necessary to fund an LBO, a buyer needs to have at least $1 in equity for every $3 in debt. Wynn and Mirage insiders already control 16 percent of Mirage Resorts' stock, but in order to pull off an LBO, at least $1 billion in new cash would have to be invested in Mirage Resorts to build up the proper equity position, analysts say.

Some speculate New York financier Carl Icahn, owner of the Stratosphere and two Arizona Charlie's, could be willing to be Wynn's partner.

"Icahn is licensed, so he and Steve Wynn could form an alliance," Bill Thompson of UNLV said. "There's talk he's using the Stratosphere to get his foot in (the Las Vegas market) so he could get his license and start dealing.

"This is the kind of thing that would draw Icahn to be a major presence in this town."

Others downplay the Icahn possibility, saying it isn't in keeping with Icahn's reputation as a "bottom-fisher."

"Icahn is adding to his casino portfolio, but he's bought most out of bankruptcy," Anders said. "(Mirage) is not a distressed security."

Icahn could not be reached for comment.

Even if Wynn could get a new investor to put up cash for equity, the $2.1 billion debt load of Mirage Resorts would probably double, as management borrowed cash to purchase the company's remaining shares. That would create crushing interest costs.

Linde estimates an LBO would result in debt levels at least 7.6 times the company's annual cash flow.

Trying to fund casino properties with such heavy debt levels has been tried in Las Vegas, without much success. The debt-heavy Stratosphere went bankrupt just months after opening, after cash flow failed to cover interest costs. The Venetian is also financed with a great deal of debt and has struggled in its first year, though the property is moving toward break-even status.

"We believe that this scenario (LBO) is not likely considering the high resulting debt level," Linde wrote.

Though there's literally dozens of options available to Wynn and Mirage Resorts, Thompson said it might be futile to guess what Las Vegas' most prominent casino boss might have up his sleeve.

"He'll do whatever people don't expect," Thompson said.

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