MGM Mirage Inc. would become the most muscular player in the Las Vegas gambling and convention scene and potentially the most formidable force in national gaming circles with its $7.9 billion all-cash acquisition of Mandalay Resort Group Inc. Glamour aside, industry experts are highly impressed by the business fundamentals forged by the deal. If the combined company can manage a hefty debt load and weather antitrust risks stemming from its Vegas concentration, they say, it would emerge as the nation’s largest gambling concern with prospects for co-branding and marketing opportunities on a scale unprecedented for the gaming industry. “I have confidence that this is a management team that will be able to pull off this transaction. The synergies are compelling,” says Marvin Roffman, president of Philadelphia-based Roffman Miller Associates, an investment management firm. The deal would give MGM Mirage control of about half of the hotel rooms on the Las Vegas Strip and consolidate its hold on 10 hotel-casinos along a five-mile stretch of Las Vegas Boulevard. It would also control 40% of the slot machines and 40% of the gaming tables in town along with the 1.8 million square-foot Mandalay Bay Convention Center in the city. Debt and Antitrust Worries Industry followers did express concern about the amount of debt the combined company would carry. The Mandalay price tag includes the assumption of $2.8 billion in debt. Together with MGM’s Mirage’s own debt, this amounts to a $8.3 billion overhang. “The debt load is significant for the deal. We see it as one of the largest constraints on the transaction,” says Patrick Diedrickson, a gaming and entertainment analyst at H&R Block Financial Advisors Inc. Roffman agrees that the debt load taken on by MGM Mirage is significant and concedes he is concerned that a catastrophic event such as a terrorist attack could undermine the deal. Another concern during negotiations was Mandalay’s desire to offload all antitrust risk to the acquirer, according to one banker working on the deal. After initial resistance, MGM Mirage finally agreed to terms that give it little opportunity to pull the plug on the deal if regulators were to require the divestiture of major assets such as the Luxor or Excalibur casinos. Presumably, this structure means that MGM Mirage is extremely confident that regulators will not insist on major changes to the deal, experts say. One no-choice divestiture would be Mandalay’s 53.5% stake in Detroit’s Motor City Casino. MGM Mirage owns the MGM Grand Detroit Casino, and Michigan law requires that the city’s three licensed casinos be separately owned. But MGM Mirage management seems to have drawn a line in the sand that blocks any sell-offs beyond Detroit. “We have no intention at this point in time in divesting any other assets,” MGM Mirage president and CEO Jim Murren said in a conference call announcing the deal. For his part, Roffman agrees with MGM Mirage’s take on the unlikelihood of significant regulatory flack. He points to the increased competition for Las Vegas houses from Indian gaming casinos in California. “If this acquisition were done a few years ago, it might not have gone through the way it was proposed. But with the rise of Indian gambling in California, the Las Vegas casinos have a formidable competitor in their backyard,” Roffman says. He adds that a recent initiative to allow Indian casinos to have unlimited numbers of slot machines at each site would intensify that competition. Despite concerns about the debt load and interregional competition from Indian casinos, Diedrickson says the deal’s benefits outweigh the risks. An underlying motivation for the current deal, he notes, is that it would give MGM Mirage the opportunity to develop new properties on land parcels held by the target in Las Vegas. Mandalay was planning to build a resort on 22 acres it owns south of its Mandalay Bay resort. It also owns another 15 acres across the street from its Luxor casino. Another deal driver, according to Diedrickson, is the diversity of the properties held by the two companies, which would allow the combined company to fight the increasing competition from Indian casinos. Roffman agrees that the deal would allow the combined company to appeal to a broad population that reaches from the low rollers at casinos like Circus Circus to the high rollers who frequent many of the other MGM Mirage properties. Vegas Antitrust Situation At the time of the MGM Mirage-Mandalay deal industry followers had been trying to anticipate the gaming industry’s next buyer. Those who fingered Harrah’s Entertainment Inc. turned out to be right. On the heels of MGM Mirage’s purchase came Harrah’s $5.2 billion acquisition of Caesars Entertainment Inc. – the largest cash and stock deal in gaming industry history. The two deals give MGM Mirage and Harrah’s control of about 75% of the hotel rooms in Las Vegas, practically daring the FTC to investigate the antitrust situation there. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com

To read the entire story, you must be logged in.
Please log in now or register with us.
Register

How useful was this post?

Tell us more about your rating decision