Hotel & Motel Management: Rolling the dice: MGM Mirage, Mandalay merger would create world's lar

Las Vegas -- MGM Mirage has agreed to acquire Mandalay Resort Group for $71 per share in cash--about $7.9 billion total--in a deal that would create the world's largest gaming and leisure company.

The price is a premium of about 30 percent above Mandalay's closing share price on the day before MGM Mirage made its initial offer on June 4. If the acquisition is approved by MRG shareholders and receives regulatory and governmental approvals, MGM Mirage will own and operate 28 casino properties in five states. The combined portfolio would comprise 24 hotels with more than 41,000 hotel guestrooms, including 11 hotel casinos on the Las Vegas Strip. MGM Mirage's portfolio would include the fifth largest convention center in the United States, which is located at the Mandalay Bay complex in Las Vegas.

"As our industry becomes increasingly competitive, and our company evolves into a multifaceted entertainment, business and hospitality franchise, this transaction will allow us to serve the ever-growing needs of our customers with outstanding gaming, lodging, dining, entertainment and convention assets," said Terry Lanni, chairman and c.e.o. of MGM Mirage, in a conference call.

"This combination will create a well-capitalized company that will generate significant free cash flow, enabling it to further invest in our current portfolio of resorts as well as in the new domestic and international growth opportunities," said Jim Murren, president, c.f.o. and treasurer of MGM Mirage, in the conference call.

Murren said he expects the acquisition to close by the end of the first quarter of 2005 and to be immediately accretive to earnings per share. Pro forma 2003 revenue for the combined company is $6.5 billion.

"This is an excellent time to combine with MGM to follow our growth path," said Glenn Schaeffer, president and c.f.o. of MRG, in the call. "The transaction clearly delivers full value of our franchise to our shareholders and creates growth opportunities to employees."

The combined company would have 70,000 employees and create one company that owns almost half the guestrooms on the three-mile long Las Vegas Strip. Despite this, Murren expects the deal to be approved. He said MGM Mirage will have to sell one of the two Detroit casinos that it would own as a result of the deal.

"We don't plan to divest any properties except for the Detroit facility," Murren said. "We have been extremely well advised from federal antitrust to local Nevada counsel and it is their view that there are no regulatory issues or local gaming issues that will prevent us from achieving our business objectives."

The breakup fee--money paid to the seller if the deal does not go through--were not available at press time. Murren said it is a standard fee.

Both companies enjoyed a record first quarter. Schaeffer said MRG was up almost double year over year in earnings per share. Murren said MGM Mirage's casino revenue was up 13 percent, noncasino revenue was up more than 11 percent, and average daily rate was the best in the company's history.

Analysts' view

The $71 per share offer is a bit more aggressive than expected, according to Marc Falcone, managing director of lodging and gaming research for Deutsche Bank Securities.

Rod Petrik, lodging gaming analyst for Legg Mason, said the deal would have been accretive for MGM Mirage even if it had to pay in the mid- to upper seventies per share of stock, but it did not have to because there were no other bidders.

The combined company would control 49 percent of hotel guestrooms, 44 percent of gaming tables and 40 percent of slot machines on the Las Vegas Strip, Falcone said. However, when looking at the countywide market, the percentages decline to 30 percent of guestrooms, 32 percent of gaming tables and 23 percent of slot machines.

"There are strong arguments for the regulators and the Federal Trade Commission, and there is no certainty of the outcome of this process," Falcone said. "The ultimate argument will be how Nevada and the FTC define the market."

Michael French, a partner who oversees the global gaming advisory practice for PricewaterhouseCoopers, said he expects the deal to be approved.

"I have to believe that with all the talented people at MGM Mirage and Mandalay Bay, there was a lot of up-front research done from a legal standpoint in advance of this," French said. "The deals they have done in the past have succeeded."

When MGM bought Mirage a few years ago, the company financed the deal by selling some noncore assets, Petrik said.

"Whether they will be forced to sell assets other than Detroit to finance this deal remains to be seen," Petrik said. "There are a lot of companies--such as Harrah's Entertainment, or even regional companies like Aztar or Boyd Gaming--that would like to have more exposure on the Strip."

Aztar owns the Tropicana in Las Vegas and Atlantic City, N.J., and Boyd Gaming Corp. is a 50-percent owner with MGM Mirage of the Borgata in Atlantic City. Caesars Entertainment is the other big casino resort owner on the Strip with four hotels there. In June, Caesars sold the off-strip Las Vegas Hilton to an affiliate of Colony Capital LLC, a Los Angeles-based international private investment company, for about $280 million.

MRG's convention business and nongaming revenue were attractive to MGM Mirage, Petrik said.

"Las Vegas is the No. 1 convention market in the United States," he said. "Las Vegas has 28 percent market share of U.S. convention business, which is twice as much as the No. 2 market, which is Chicago. With Mandalay's new convention space, it is the largest owner of privately owned convention space in the country."

Convention space is important in Las Vegas because it helps fill hotel rooms Sunday nights through Wednesday nights, which historically are weak occupancy nights. The market does not have trouble filling its rooms Thursday nights through Sunday.

Ten years ago, gaming earned 70 percent of all revenue in Las Vegas, Petrik said. Today, it accounts for slightly less than half of all revenue.

"With Mandalay, gaming is about 30 percent of [its Strip revenue] and the other 70 percent is hotels, restaurants, shops and shows," he said. "Everybody else is moving in that direction, but Mandalay embraced it quicker due to their focus on the convention business. It was a big gamble that paid off."

MGM Mirage revenue is 50 percent from gaming and 50 percent non-gaming. badams@advanstar.com

Forming a giant

Company                    Casino     Hotels     Guestrooms
                          Resorts

MGM Mirage                     12         11         21,154
Mandalay Resort Group          16         13         19,916
TOTAL                          28         24         41,070

Source: H&MM research

Who owns the most on the Las Vegas Strip?

Company           Hotel                  Guestrooms

MGM
Mirage
                  MGM Grand                   5,034
                  Mirage                      3,049
                  Bellagio                    3,005
                  Treasure Island             2,900
                  New York-New York           2,023
                  Boardwalk                     654

Total                                        16,665

Mandalay
Resort Group
                  Mandalay Bay                4,760
                  Luxor                       4,408
                  Excalibur                   4,002
                  Circus Circus               3,744
                  Monte Carlo                 3,002

Total                                        19,916

Caesars
Entertainment
                  Flamingo                    3,565
                  Paris                       2,900
                  Bally's                     2,800
                  Caesar's Palace             2,400

Total                                        11,665

Harrah's
Entertainment
                  Harrah's Las Vegas          2,526

Las Vegas
Sands Inc.
                  The Venetian                4,049

Aladdin
Gaming
                  Aladdin
                  Resort & Casino             2,567

There are 73,000 hotel rooms on the Strip

Source: H&MM research