The Wall Street Journal Online
Buying Las Vegas
In Bid for Mandalay Resort,
MGM Mirage Could Become
Biggest Casino Powerhouse
By CHRISTINA BINKLEY
Staff Reporter of THE WALL STREET JOURNAL
June 7, 2004; Page B1
If billionaire Kirk Kerkorian gets his way, what happens in Vegas
will stay in his pocket.
In a grab to capture the resurgent popularity — and profitability —
of Las Vegas, Mr. Kerkorian’s MGM Mirage on Friday bid to buy rival
Mandalay Resort Group, a deal that would turn his casino company
into an unprecedented powerhouse. MGM Mirage’s offer of $68 a share,
or $4.85 billion, plus the assumption of $2.8 billion in debt, would
make it the biggest acquisition in the history of the casino industry.
If the marriage of MGM Mirage and Mandalay passes the scrutiny of
antitrust regulators, Mr. Kerkorian — who turned 87 yesterday — would
dominate the Las Vegas Strip just as it experiences a revival. He would
control more than half the 72,000 hotel rooms on the famous boulevard
and most of the acreage along the west side of the Strip from its
southernmost casino, Mandalay Bay, and northward for roughly two miles.
The company would own some of the hottest properties in Las Vegas —
including the high-end Mandalay Bay and Bellagio — and it would own
more casinos in places like Atlantic City, Detroit and Australia. The
deal also would make Terry Lanni, the stern 60-year-old chairman
and chief executive of MGM Mirage, the unlikely king of Vegas casino
operators.
The offer followed several days of informal discussions in which no
price was discussed, according to a number of people familiar with
the talks. MGM Mirage made the initial approach about a week ago with
some theoretical discussions between the two company’s presidents and
chief financial officers, Jim Murren of MGM Mirage and Mandalay’s Glenn
Schaeffer. The talks got serious Tuesday afternoon when Mr. Kerkorian
and Michael Ensign, Mandalay’s chairman and chief executive, met in
Las Vegas.
Executives of MGM Mirage hoped to keep the talks quiet and
announce a done deal as early as today, say people familiar with the
situation. But they were forced to name a price and take their offer
public on Friday, when Mandalay’s stock surged 10%, or $5.65 to $60.27
in trading on the New York Stock Exchange. Mandalay’s stock initially
climbed Thursday evening on the release of second-quarter earnings
nearly double those of the year-ago quarter.
But by Friday afternoon, rumors were swirling in Las Vegas that a deal
was in the making, says Joe Greff, an analyst with Fulcrumb Global
Partners LLC, who was in Las Vegas then. MGM Mirage’s Mr. Lanni sent
Mandalay a so-called bear hug letter — an unsolicited offer proposing
terms for a sale — and the companies put out terse press releases. MGM
Mirage noted the price and emphasized its 12.8% premium over the
Friday closing price of Mandalay shares. Mandalay’s note promised to
evaluate the proposal and to “respond to MGM Mirage in due course.”
People familiar with the talks said they expect a deal to be struck
this week. These people said raising funds for the purchase won’t be a
problem, as MGM Mirage has a $1.5 billion credit line and the company
is likely to get further credit if necessary. With top executives at
Mandalay willing to sell, the only real issue is price, the people
said, unless a third party enters the bidding. Joe Greff, an analyst
with Fulcrumb Global Partners LLC, says the deal makes “financial and
strategic sense” for MGM Mirage and calculates that there’s room for
it to go higher with the price. He says he believes the deal would
add to MGM Mirage’s earnings up to an offer of about $81 a share.
The timing comes just as Las Vegas is entering a new phase in its
storied history. Its return to its sinful roots as a home to topless
shows, hot night clubs and naughty behavior has been synthesized into
its latest widely known advertising slogan, “What happens in Vegas,
stays in Vegas.”
That, combined with the resurging economy and a sharp increase in
discount airlines’ service from the East Coast, have all helped
make Las Vegas a heavily visited and newly cool place to hang
out. Mandalay’s Mandalay Bay resort has been at the heart of all that,
with its after-hours clubs, array of trendy restaurants and hotels,
and a vast convention center that draws visitors during the week.
The Mandalay Bay was the first to bring a well-known five-star hotel
brand to the Strip, with its Four Seasons hotel. Recently, it opened
“THE hotel”, a hip design-style suite hotel that appeals to 20-
and 30-something visitors who are discovering Las Vegas for the
first time. The television show “Las Vegas” starring James Caan is
sometimes filmed there.
For MGM Mirage, the addition of Mandalay Bay, the pyramid-shaped Luxor,
the Excalibur castle and RV-oriented Circus Circus would provide a
broad expanse of casinos from high end to lowbrow. Mandalay Bay, with
a ballroom big enough to accommodate tractor-trailer trucks, would
allow MGM Mirage to compete head-to-head for convention business with
Sheldon Adelson’s Venetian casino and Sands Expo convention center.
The power of crossmarketing among the casinos — especially the ability
to offer loyalty goodies through a companywide frequent-customer
program — would give the new giant a huge advantage over smaller
competitors like Caesars Entertainment Inc. and the Venetian.
Still, it isn’t clear that the Federal Trade Commission would allow
the merged giant to keep all the properties of both companies. In
fact, it’s a sure thing that it would have to sell off a property
in Detroit, where state law restricts a company to holding only one
license. The FTC could seek the sale of directly competing properties
as a condition of approval.
People familiar with MGM Mirage insist the company is confident it can
assuage antitrust concerns. Company insiders also say it would be no
big deal if the merged company were required to sell off a property
or two.
Mr. Kerkorian also is involved in another set of negotiations —
talks to sell to Sony Corp. his controlling stake in his other main
investment vehicle, the Metro-Goldwyn-Mayer Inc. film studio in
Los Angeles. There’s no connection between the two potential deals,
says a person close to Mr. Kerkorian, who owns 74% of the studios.
People familiar with the situation say Sony is struggling to pull
together its consortium of private equity backers and MGM hasn’t
extended a period of exclusivity for the negotiations, opening the way
for other bidders. Time Warner Inc. and General Electric’s NBC have
previously expressed an interest. Time Warner’s board also recently
gave Warner Bros. preliminary authorization to pursue a bid, say people
familiar with the situation. However, Time Warner has balked at Mr.
Kerkorian’s asking price in the past. MGM is believed to be seeking
$5 billion, including the assumption of $2 billion of debt.
–Merissa Marr and John R. Wilke contributed to this article.
Write to Christina Binkley at christina.binkley@wsj.com