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Rod Smith

MGM Offer Stalled by Price

11 June 2004

LAS VEGAS -- Concerns that antitrust issues might trip up MGM Mirage's plans to buy Mandalay Resort Group were fading fast Thursday as talks between the companies seemed to be boiling down to nothing more than price.

Institutional investors, industry analysts and hedge fund managers said a deal that would create the world's largest gaming company seemed to be focusing on a price between $70 and $72 a share.

Late Thursday, The Associated Press reported that negotiations had reached a standstill after MGM Mirage refused to raise its original offer of $7.65 billion, $68 a share, based on Mandalay's stock price when the offer was announced publicly June 4.

But a source close to the negotiations told the Review-Journal late Thursday that no new developments had occurred and that Mandalay is still considering the MGM Mirage offer.

"They aren't going to jump. Mandalay is taking the proposal seriously," the source said.

Sources close to the talks earlier Thursday declined to comment on the negotiations or speculate on when they might finish.

Analysts said an announcement is most likely to come Monday morning after the companies' consultants have had a chance to even out the rough edges left in any agreement executives reach.

MGM Mirage has given Mandalay until 5 p.m. today to accept its buyout proposal, which would create a gaming giant with 33 casinos around the world and combined revenues of nearly $7 billion a year.

Mandalay has hired Cravath, Swaine & Moore, the New York law firm famous for defending AT&T in its antitrust case, as outside counsel, and Merrill Lynch & Co. as investment banker for negotiating the sale.

MGM Mirage has hired the Los Angeles law firm Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, which represented the company in its $4.4 billion takeover of Mirage Resorts, for advice with the buyout talks.

Analysts said the two Las Vegas-based companies' choice of consultants suggests that Mandalay is not trying to block what would be the largest gaming company merger ever and that the companies have discussed possible market concentration issues and decided they are unlikely to block a deal.

Sources agree that Michigan is the only area where regulators would force the emerging company to sell one of the properties the companies own.

Each company operates a casino in Detroit, which has issued three gaming licenses to operators. Mandalay has a 53.5 percent stake in the MotorCity Casino, and MGM Mirage has a temporary operation in downtown Detroit and is planning to replace it with a $575 million casino.

The Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice, the Nevada Gaming Control Board and the Nevada Gaming Commission, all of which would have to give a final deal their approval, are much less likely to raise any objections to a buyout deal because of market concentration issues, sources said.

Regulators in Illinois, Mississippi and New Jersey would have to review the deal, but analysts said they are unlikely to raise any objections. And if they did, the sources agreed that a merged company probably would dump any property that concerned state regulators.

FTC and Justice Department spokesmen said they do not comment on pending deals and declined to discuss how federal antitrust laws might apply to the gaming industry.

State regulators are barred from discussing any deal they might rule on. Gaming Control Board Chairman Dennis Neilander said his agency will review a merger closely under the multiple licensing, or antitrust, provisions of state Regulation 3070.

Local gaming and antitrust attorneys said to anticipate how the state regulation might be applied is difficult because the regulation was adopted four years ago and has never been applied.

Gaming lawyers and industry experts agreed the regulatory world is much more relaxed today than when the U.S. Department of Justice blocked the sale of the Landmark and Stardust casinos to billionaire Howard Hughes in the 1960s.

They said federal and state agencies are unlikely to raise objections if the companies agree to a friendly, rather than a hostile, takeover.

Nevada's regulation of the industry started in 1968 when the state adopted its original multiple-licensing rule to block Hughes, who already owned five Strip resorts, from buying any additional casinos, said a lawyer who asked not to be identified.

"When Howard Hughes was around in the late '60's, he was in a position to buy all of Las Vegas, a 100 percent monopoly, and there was a lot of fear of that," the lawyer said.

"That's why the state regulation was passed in the first place, but the original regulation was never used," the lawyer said.

Hughes owned the Desert Inn, Silver Slipper, Castaways, Frontier, the Sands and Harolds Club in Reno, said University of Nevada, Las Vegas professor and casino industry expert Bill Thompson.

"He wanted to buy everything he could see from the Desert Inn (where he lived in a suite on the top floor)," he said.

The Justice Department under President Johnson and Attorney General Ramsey Clark refused to approve Hughes' purchases.

Hughes then contributed $100,000 to Richard Nixon's 1968 campaign, and the Justice Department in 1969, then under the direction of Attorney General John Mitchell, dropped its objections, the attorney said.

Hughes ended up buying the Landmark but had lost interest in the Stardust, he said.

Since then, federal antitrust concerns seldom have affected gaming industry mergers in Nevada, and the current state regulations have never been used to block a merger.

Under the Reagan administration, the Justice Department adopted relaxed standards, which have never been applied to a Nevada deal, Boyd School of Law professor Bob Lawless said.

He said that actions taken against Hughes are not relevant to any market consolidation today.

Attorneys and experts at the University of Nevada, Las Vegas said current regulations are much more consumer-oriented than they were when Hughes was buying up casinos.

Also, a combined MGM Mirage-Mandalay would control a much smaller share of a much larger market than any gambling empire Hughes could have built.

In 1967, Nevada was the only state where gambling was legal. Today, the state has less than a quarter of the casino operations in the country.

If the buyout deal does go through, the emerging company would control almost half of the hotel rooms on the Strip, about 44 percent of the table games and some 40 percent of the slots.

The concentration ratios shrink quickly if regulators think of the competitive market as it applies to all of Las Vegas, all of Nevada or all of the country.

Legal experts agreed that defining the relevant market -- local, state or national -- is the key question in deciding whether a consolidation will affect competition.

The Bush administration seldom has applied federal antitrust regulations to local jurisdictions, instead considering gaming to be a national industry.

"Not only is the size and scope of the (buyout) a lot different, but this administration wouldn't recognize an antitrust suit if it ran across one," said University of Nevada, Las Vegas History Department Chairman Hal Rothman.

Though the combined company is likely to emerge from antitrust scrutiny largely unscathed, analysts are quick to point out it might sell off some of Mandalay's casinos, especially Circus Circus in Las Vegas and MGM Mirage's casinos in Jean.

Even if a merged company ended up selling off those properties and one of its Detroit casinos, the new company would own some of the most popular megaresorts on the Strip, including the Bellagio, MGM Grand, The Mirage and Mandalay Bay.


Percent of markets controlled by MGM Mirage and Mandalay Resort Group combined:

Strip - Clark County - Nevada

Slots - 40 - 23 - 19

Tables - 44 - 32 - 27

Rooms - 49 - 30 - 30

MGM Offer Stalled by Price is republished from