Kirk’s new enterprise

Financial Times
Jun 15, 2004

Kirk Kerkorian has not lost his appetite for big rolls of the
dice. With one hand, the 87-year-old is inching towards a sale of
his Metro-Goldwyn Mayer film studio. With the other he is poised to
double up on his casino interests. MGM Mirage’s improved offer of
$71 a share – a 30 per cent premium to Mandalay Resort Group’s share
price before the approach – would catapult it to number one in the
US gaming industry.

There are regulatory concerns. MGM/ Mandalay would control 49 per
cent of hotel rooms, 44 per cent of tables and 40 per cent of slot
machines on the Las Vegas Strip. But if the market is interpreted more
broadly the combined share retreats to more reasonable levels. Any
issues are likely to be addressable through asset sales. The deal
is no knockout for Mandalay. It values the business at about 9.7
times earnings before interest, tax, depreciation and amortisation,
compared with MGM’s own rating of 8.5 times. But it would drag Mandalay
investors away from the table after a great winning streak. At $71,
its shares will have risen by 130 per cent since January last year,
compared with MGM’s 43 per cent.

MGM, meanwhile, can probably squeeze out $100m of cost savings. The
deal would broaden its portfolio with Mandalay’s lower-end resorts and
get access to more property development opportunities in the strong
Las Vegas market. MGM could probably stretch to finance the $7.9bn
transaction with debt. But with its track record on integrating deals
there is clearly a chance that it will tap shareholders for some of
the chips.