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MGM Mirage Entangled in Chicago Casino Debate

LAS VEGAS -- The political and legal stakes in MGM Mirage's drive to enter the Chicago-area gaming market have gone up immensely over the last week.

Yet despite the increasing pressure, observers expect MGM Mirage to stay on course with its plans to buy out the developers of a Chicagoland casino.

"They need to be very careful to protect the interests of their shareholders and their company," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. "But unless someone says, 'You shouldn't do this,' I don't see much trouble in progressing as they are. The economics of a casino there are very good, and there's nothing illegal or inappropriate about an acquisition."

The simple reason -- a casino in Rosemont, located directly east of Chicago's O'Hare Airport, would be the closest casino to the nation's third-largest city. And it could be very profitable, even by Las Vegas Strip standards.

"It's clear this property could do ... as much as, if not more than, $125 million (in annual cash flow)," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "That would make it the second most profitable riverboat casino in the country."

Under a deal now being considered by the Illinois Gaming Board, MGM Mirage would acquire Emerald Casino Inc. for $615 million. Emerald had started construction of a $100 million-plus riverboat casino in the Chicago suburb of Rosemont in mid-1999 before the Illinois board ordered a halt in February 2000.

The Illinois Gaming Board convened in a closed-door meeting in Chicago Monday to discuss the pact, but it was unknown if it took any action. Board members offered no comment after the meeting.

The deal is considerably more than just a standard buyout. One year ago, Emerald's bid to build the Rosemont casino was denied by the Illinois Gaming Board. The board cited concerns that Emerald's majority shareholders had not been honest with gaming regulators. And there were concerns about the alleged organized crime ties of construction companies working on the project.

So to get the deal moving forward, $160 million of the proceeds from a buyout would be paid in the form of a fine to the state of Illinois. The rest would be divvied up by Emerald's investors at a considerable profit.

That is enraging many in the Chicago area. The Chicago Tribune called the buyout "a preposterous ploy," while the Chicago Sun-Times reported that two of the five members of the Illinois Gaming Board -- including its chairman -- are already against the deal. (Three board members would have to vote in favor of the Emerald buyout before the deal could proceed.)

"These are investors for whom state legislators ... wrote a special law that all but guaranteed them the exclusive right to open a casino in suburban Rosemont," the Tribune said in a Monday editorial. "Now those investors are exploiting their early advantage to claim they should collect millions, in effect because their partnership allegedly lied and played footsie with mobsters."

The site is becoming entangled in a federal criminal investigation as well. The board has confirmed it has been subpoenaed by a federal grand jury, which demanded all records of the Emerald Casino. The subpoena came a week after the indictment of Nick Boscarino -- husband of one of the Emerald shareholders and alleged organized crime associate -- on charges of fraud and money laundering. The Emerald investment held by the Sherri Boscarino Trust was cited by the Illinois board as one of the reasons for the rejection of Emerald's Rosemont plans.

Boscarino was a one-time associate and business partner of Don Stephens, the mayor of Rosemont.

MGM Mirage isn't the target of this federal investigation. But it is coming under fire for its role in the deal.

"Rosemont is certainly more than their match," said Tom Grey, executive director of the National Coalition Against Legalized Gambling. "MGM (Mirage) cannot run a casino in Rosemont without having it effected by the (organized) crime in the community it's in."

Eadington acknowledged MGM Mirage would have to be cautious.

"Sometimes your executives (at casinos) acting as your agents can get you in terribly serious trouble," Eadington said. "As long as you have a very strong discipline, and everyone understands what the law is, what appropriate behavior is, you may come out unscathed."

MGM Mirage officials could not be reached for comment Monday.

Years ago, MGM Mirage would have had to get permission from the Nevada Gaming Control Board to proceed with the deal. Under current regulations, however, the Nevada board cannot block it.

MGM Mirage instead will have to make sure it complies with the "Foreign Gaming Act," which states that all Nevada licensees conduct themselves in accordance with the laws of all jurisdictions where they operate casinos.

Dennis Neilander, chairman of the Nevada control board, said Nevada is monitoring the Rosemont situation. "There's a lot of facts that have yet to come out in that situation," Neilander said.

"MGM does have an obligation to do its due diligence, and I'm certain it's doing that," Neilander said. "They have to be convinced they can conduct business there in a lawful manner, and not associate with persons that are unsuitable."

But the potential profit for MGM Mirage could make it worth the headaches, analysts say.

Zarnett points out that a Chicago casino would help diversify MGM Mirage 's casino portfolio -- a critical issue following the post-Sept. 11 tourism slowdown in Las Vegas.

"Absolutely (the company should proceed)," Zarnett said. "MGM is clearly one of the leaders in the industry and has brand names which are clearly recognizable in a city like Chicago. It's already invested significant resources to lay the groundwork. The issues here have nothing to do with MGM, it's how they get rid of the former owners.

"There are limited opportunities for expansion. This would be a significant opportunity, so they should pursue it."

William Schmitt, a gaming analyst with CIBC World Markets, points to the Grand Victoria riverboat casino in Elgin, Ill., currently the closest casino to Chicago. That property, half owned by Mandalay Resort Group of Las Vegas, produced more cash flow in the most recent quarter ($33.5 million) than Mandalay Bay on the Las Vegas Strip ($30 million).

But even with a closer location, MGM Mirage would be hard pressed to top the performance of Grand Victoria, Schmitt said, since Illinois casinos are only permitted to have up to 1,200 gaming "positions" (a combination of slot machines and table game seats).

"There's literally someone at every slot machine every day (at Grand Victoria)," Schmitt said. "The location (in Rosemont) is phenomenal, there's no doubt about it. But how much more can you squeeze out of a slot machine?"

But the current web of issues entangling the casino has Schmitt wondering whether it's even an issue worth examining.

"I would be shocked if you see a casino there in three years, because of all the crap floating around," Schmitt said. "I think this is much to do about nothing."

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