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Rod Smith

MGM-Mandalay Lifts Gaming Stocks

2 July 2004

LAS VEGAS -- Investors bid gaming stocks modestly upward in June largely based on the interest created by the $7.9 billion buyout agreement between MGM Mirage and Mandalay Resort Group.

"The market put a deal premium into a lot of the stocks when the merger was announced so the gaming stocks got a (one-time) pop," said Eric Hausler, an analyst with Susquehanna Financial Group in New York.

The Applied Analysis Gaming Index, a weighted average of local gaming stocks, closed June at 258.25, up 5 percent from May and up 53 percent from June 2003.

Operators led the sector with a 22-point increase, or 9 percent increase of the total index increase. But manufacturers were blistered with a 9-point decline, or a 4 percent downward tug on the index, said Brian Gordon, spokesman the Las Vegas-based financial consulting firm.

He said the increases came no surprise, with Mandalay Resort Group posting the single largest gain due initially to strong quarterly earnings, immediately followed by the $68 per share purchase price offer by MGM Mirage. Later in the month, the offer settled on $71 per share, where Mandalay is still trading.

In addition to the Mandalay acquisition, MGM Mirage reported plans to develop a casino in Macau, Caesars Entertainment completed the sale of the Las Vegas Hilton, and Harrah's Entertainment confirmed its plans for expansion in Las Vegas, Gordon said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said the theme of consolidation, including Boyd Gaming Corp.'s buyout of Coast Casinos and Harrah's Entertainment's purchase of Horseshoe Gaming, was the real catalyst renewing enthusiasm in gaming stocks.

Otherwise, he said, the economic landscape remained much the same, and Las Vegas continues along a growth path analysts have called "almost incomprehensible" because it is so strong.

"Atlantic City and the riverboats were a little softer, but the merger (mania) was the catalyst that drove the market (in gaming stocks)," Greff said.

Overall, gaming stocks outpaced the Standard & Poor's 500 index, which climbed only 1.5 percent, although manufacturers' shares were clobbered by concerns proliferation would falter in Pennsylvania and California.

"Manufacturer stocks are moving to their own drummers, with news out of California and Pennsylvania, and they'll continue to do it over the near term," Hausler said.

California Gov. Arnold Schwarzenegger recently reached agreement with five tribes on new compacts that would lift the 2,000 slot limit on tribal casinos. But a sixth tribe in the San Diego area has sued to kill the expansion, and other tribes are balking at paying added fees to the state.

Similarly, Bear, Stearns & Co. analyst Mark Abramson said in an investor advisory that the Pennsylvania Legislature in June teetered toward agreement on bills to legalize as many as 61,000 slot machines over time, but analysts said procedural issues persisted that could derail the expansion of racinos, or slots at tracks, in the Keystone State.

Adding to the confusion, the Rhode Island Legislature last week passed bills to approve the Harrah's/Naragannsett West Warwick casino voter referendum bill, but Gov. Donald Carcieri has promised to veto the measure if approved by voters in November, Deutsche Bank analyst Marc Falcone said.

MGM-Mandalay Lifts Gaming Stocks is republished from