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Rod Smith

MGM Scales Top of Heap

26 April 2005

MGM Mirage completed its $7.9 billion merger with Mandalay Resort Group on Monday afternoon, making it the largest gaming company in the world and the dominant business interest in Nevada.

It was the largest merger in gaming industry history, beating out the previous record deal: the $6.4 billion MGM Grand buyout of Mirage Resorts in 2000.

The new company, which continues under the name MGM Mirage, controls almost half of the approximately 75,000 hotel rooms on the Strip and will have revenues of about $7 billion annually.

MGM Mirage Chairman Terry Lanni said earlier Monday that with the merger, his company is now totally committed to Nevada.

"We see great opportunities in Nevada, not just now, but moving forward, and we've made a significant wager on the future of Nevada," he said.

With the merger complete, the scale of MGM Mirage's operations in Las Vegas is unprecedented, Susquehanna Financial Group gaming analyst Eric Hausler said.

"In the future, they're going to be the undisputed champion of Las Vegas in terms of capital investments. They're making a massive bet on the future of the city, and they're going to be putting even more capital in," he said.

MGM Mirage in November unveiled plans for the $4.7 billion Project CityCenter. The "urban center" project will include 4,000 hotel rooms, 1,650 condominium units and a 400-room boutique hotel.

The merger gives MGM Mirage 20,000 rooms previously owned and operated on the Strip by Mandalay Resort Group at Mandalay Bay Resort, The Hotel, Luxor, Excalibur, Circus-Circus, Monte Carlo and the Four Seasons at Mandalay Bay.

MGM Mirage already operated almost 18,000 Strip rooms at the Bellagio, MGM Grand, The Mirage, Treasure Island, New York-New York and the Boardwalk.

"MGM Mirage-Mandalay is (now) a homegrown behemoth, the major player in the industry with tremendous influence in the community," said Hal Rothman, University of Nevada, Las Vegas history department chairman.

"This buy unequivocally weds its future to that of Las Vegas, which I suspect will be a good deal for both. MGM is a powerful brand; so is Las Vegas. They should elevate each other," he said.

Analysts said the buyout adds a new dimension to MGM Mirage's business by giving it a major convention center.

"The merger brings them a couple different types of properties, plus the big convention center," Hausler said.

"They'll be able to leverage midweek convention business around their properties. Now, they're going to have enough hotel rooms to sell up to the largest convention and keep all (all conventioneer) rooms within their system," he said.

MGM Mirage also took over Mandalay Resort Group's Nevada properties in Reno, Laughlin, Jean and Henderson, and the Gold Strike in Tunica, Miss.

MGM Mirage already owned casino resorts in Laughlin and Primm and properties in Biloxi, Miss., and Detroit. The company also owns the Borgata in Atlantic City in a joint venture with Boyd Gaming Corp.

Lanni said the merger is being accomplished with no significant layoffs.

Out of Mandalay's 32,000 employees, fewer than 100 have left the company, including top management, he said. The new company has a little more than 70,000 workers, Lanni said.

MGM Mirage's tenure at the top of the heap will be short-lived.

Harrah's Entertainment will become the largest gaming company once its $9.4 billion merger with Caesars Entertainment is completed, now expected by the end of June.

But Lanni said MGM Mirage still will be the largest Nevada taxpayer, including gaming and room taxes. Also, the new company will be the largest real estate holder in Nevada.

Rothman said the MGM Mirage-Mandalay deal is part of a trend toward consolidation, a consequence of what he called the Mirage phase, the period from 1989 to 2000 when roughly 60,000 new hotel rooms were built in Las Vegas.

"This was a critical step in the legitimization of gaming as an industry and to its integration in the larger corporate economy," he said.

The bar for entry into the gaming industry has been raised, he said.

"It used to be, seven or eight years ago, that a $300 million property was worth the attention of the biggest fish; now you've got to be at $1 billion."

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said MGM Mirage and Harrah's Entertainment might divest themselves of some smaller properties that do not fit with their overall development strategies.

That will encourage the development of niche operations and the entry of new investors and operators in the gaming industry, he said.

But he warned that the growing concentration of the industry might be an invitation to added federal scrutiny and regulation.

The MGM Mirage merger had been awaiting regulatory approvals since financing for the deal was wrapped up late last year.

The last regulatory hurdle came Thursday when Illinois gaming regulators gave MGM Mirage its blessing.

The Illinois Gaming Board approved a plan to move Mandalay's 50 percent ownership of the Grand Victoria riverboat casino into an escrow account that will be managed by a trustee.

MGM Mirage expects to take over control of Mandalay's ownership in the Grand Victoria after the Illinois Gaming Board completes its review of the company and issues a finding of suitability. No timetable has been set.

The $7.65 billion proposal to unite the two titans took Wall Street by surprise last year and rocked the gaming world after hitches arose in negotiations.

MGM Mirage initially offered $68 per share in a cash transaction that included the assumption of about $2.8 billion in debt, but Mandalay balked.

Sources said the deal got back on track after MGM Mirage negotiators dropped a $100 million cancellation clause that had been at the heart of Mandalay's initial rejection of the proposal.

After Mandalay resisted, MGM Mirage also upped the ante to $71 a share, and the boards of directors of both companies approved the revised deal on June 15 after a weekend of negotiations. The $7.9 billion union also included the assumption of almost $3 billion in Mandalay debt.

MGM Mirage's initial plan was to close the transaction by the end of March after approvals from shareholders of both companies, the Federal Trade Commission and state regulators.

Mississippi's gaming commission was the first regulatory agency to approve the deal, giving its unanimous blessing Dec. 15, even before the Federal Trade Commission ruled.

The merger was cleared by the Federal Trade Commission on Feb. 16, paving the way for Nevada's gaming regulators to consider the buyout later in the month.

Gaming Control Board Chairman Dennis Neilander said the state would act only after the companies got a green light from federal regulators, but the board was able to clear the deal before the end of February.

The union was on track, a pace that antitrust experts said was a record, when vacancies on the Illinois Gaming Board created a snag. That was eliminated a few weeks ago when Gov. Rod Blagojevich appointed new board members.

MGM Scales Top of Heap is republished from