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Rod Smith

Casino Merger Value Rises

23 August 2004

The preliminary price for MGM Mirage to buy Mandalay Resort Group has edged up to $8.1 billion in the two months since the deal was announced in June, but Wall Street analysts on Friday said the merger still makes sense for investors and the combined company.

Required pro forma estimates for the combined companies filed Friday with the Securities and Exchange Commission also underscored the scale of the combined company, which would have been the largest gaming company in the world had the deal been consummated last year.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said the $200 million, or 2 1/2 percent, increase in the purchase price from the previously announced $7.9 billion was attributable to the increased prices of Mandalay Resort Group bonds since the deal was made public June 15.

"MGM (Mirage) has had a better bond rating, and, since it will assume the (Mandalay) debt, the market is pricing Mandalay bonds accordingly (to reflect the improved credit ratings they will have)," he said.

Hausler also said a new financial analysis shows the merger will immediately add shareholder value despite the price increase.

Moreover, he said the company should realize substantial synergies by combining operations.

He said the synergies should come from operating the Mandalay Convention Center, the increased focus on Las Vegas, the scale of operations and the broad range of gaming market segments the combined company will be able serve.

Deutsche Bank analyst Marc Falcone also said that the combined company will have tremendous growth opportunities that are not evident from the financial results alone.

"We're confident MGM (Mirage) will make this a significant event in terms of shareholder value because of the synergies created," he said.

"What is not well understood is the amount of growth possible with the combined companies. There are at least 12 areas (of real estate) ripe for development between Atlantic City and Las Vegas," Falcone said.

He was particularly bullish about the increasing value of the real estate the company will control around the Strip, and its potential for development.

If MGM Mirage's buyout of Mandalay is completed, the emerging company will end up with more than 100 acres in four prime sites north of Russell Road. MGM Mirage Chairman Terry Lanni said recently work is already under way to evaluate the sites' development potential.

Hausler said the pro forma financial results included no assumptions for synergies the combined company will be able to achieve, which will add to the value of the merged operations.

"Just buckling it together doesn't tell the whole tale," he said.

MGM Mirage disclosed the combined company for all of 2003 would have had an operating income of $1.2 billion on total revenues of $7.2 billion.

That would have translated into earnings per diluted share of $1.18, compared with $1.52 MGM Mirage previously reported.

For the six months ending June 30, the combined company would have had operating income of $807.1 million on total revenue of $3.9 million.

Adjustments were made for the fact that Mandalay's fiscal year historically has ended Jan. 31 rather than Dec. 31.

MGM Mirage closed Friday at $40.60, up 32 cents per share or 1 percent on normal trading volume of 845,000 shares. Mandalay closed at $67.25, down 1 cent or less than 1 percent on 459,000 share, one-third normal trading volume.

MGM Mirage officials said they are in a quiet period while the deal is being reviewed by the SEC and could not comment.

Harrah's Entertainment has not yet released similar financial estimates for its pending $9.4 billion merger deal with Caesars Entertainment.

Casino Merger Value Rises is republished from