MGM Casino Deal Back on Track

Los Angeles billionaire Kirk Kerkorian is on his way to becoming the undisputed king of Las Vegas.

The deal that would create the world’s largest casino company appeared back on track Monday when Kerkorian’s MGM Mirage and Mandalay Resort Group signaled that they had agreed on the terms of a $4.8-billion buyout.

If approved by the companies’ directors and by antitrust regulators, MGM Mirage’s proposed acquisition of Mandalay Resort would be the largest ever in the casino business.

It also would give the 87-year-old Kerkorian, MGM Mirage’s majority shareholder, control of about half the business on the fabled Vegas Strip. The combined company’s holdings would include 36,500 rooms, 22,000 slot machines and 1,050 gaming tables at the Bellagio, MGM Grand, Mandalay Bay Resort, Excalibur and seven other hotels.

In a city where legendary figures such as mobster Benjamin “Bugsy” Siegel and reclusive tycoon Howard Hughes have held sway, the publicity-shy Kerkorian would rule over the largest concentration of gambling power since Hughes’ 1960s heyday.

“Kerkorian is a master strategist who sees the industry clearly, “ said Hal Rothman, a University of Nevada, Las Vegas, history professor who has written extensively on the gaming industry. “He calculates his opportunities and pounces.”

Analysts say the proposed deal ups the ante in the looming battle between MGM Mirage and Las Vegas trailblazer Steven Wynn, who sold his Mirage Resorts Inc. to Kerkorian four years ago for $4.4 billion.

Next spring, Wynn is set to open Wynn Las Vegas, a luxury resort at the north end of the Strip that will compete with the Bellagio and the Mandalay Bay for high-stakes players of table games such as blackjack, poker and baccarat.

Even without Mandalay Bay, MGM Mirage dominates the Strip’s high-end business. But Robin Farley, an analyst with UBS Securities, said she expected Wynn to make inroads into that lucrative gambling market when his lavish new casino opened.

MGM Mirage’s proposed buyout of Mandalay also sets up a battle between the north and south ends of the Strip -- the twin poles of the Vegas gaming scene.

At the north end, Wynn’s $2.4-billion resort is expected to spark a renaissance in an area populated by second-tier, medium-budget properties such as the Stardust and Riviera. Three miles down Las Vegas Boulevard, meanwhile, MGM Mirage is hoping to create what may be the highest concentration of casinos in the world.

Starting with the posh Bellagio on the southwest corner of Flamingo Road, MGM Mirage would have a Monopoly-like row of seven hotels ending with the Mandalay Bay Resort. Across the street sits the giant 5,000-room MGM Grand.

That very concentration could pose problems. Besides shareholder and board approval, the buyout faces potentially tough scrutiny from federal antitrust regulators and Nevada gaming officials.

“This is something that antitrust regulators are going to want to look at,” said Bruce Sokler, a Washington antitrust attorney.

Although a source familiar with the negotiations said the boards of the Las Vegas-based companies were expected to approve the proposed acquisition today, the deal almost didn’t happen.

After mulling over MGM Mirage’s $68-a-share offer for a week, Mandalay negotiators were surprised Friday by a last-minute demand that would have given Kerkorian’s company a 15-month window to walk away from the transaction if regulators forced it to sell casinos. Mandalay rejected the offer and broke off talks.

But MGM Mirage came back over the weekend, offering to do the deal without the escape clause. That left negotiators to settle on price, and an agreement was struck at $71 a share -- a 30% premium over Mandalay’s closing price the day before the initial offer was disclosed. The total value of the transaction would be about $7.9 billion, including $3.1 billion in various forms of debt.

Including its casinos in Reno and Laughlin, Nev., and operations in New Jersey, Mississippi, Michigan and Australia, the combined venture would have $6.8 billion in annual sales, surpassing Caesars Entertainment Inc. and Harrah’s Entertainment Inc. as the largest gaming company in the United States.

To appease antitrust regulators, MGM Mirage attorneys probably will argue that there is plenty of competition for the gambler’s dollar nationwide. Mike Cowie, an antitrust attorney and former senior litigation counsel with the Federal Trade Commission, said he expected the company to point to everything from the Indian gaming halls of California in the West to the casinos of Atlantic City on the East Coast.

If the merged company is judged by the FTC to have significant control over pricing of rooms and conventions, antitrust attorney Sokler said, MGM Mirage could be forced to sell off properties before completing the merger.

Those properties could include Treasure Island on the Strip; casinos in the Nevada hamlets of Primm and Jean along Interstate 15 on the way to Las Vegas from Southern California; and Mandalay’s interest in the Motor City Casino in Detroit.

William Schmitt, an analyst with CIBC World Markets, said he also expected the deal to spur additional mergers and acquisitions in the gambling industry, “as other significant players adjust to the competitive landscape on the Strip.”

That could spark Harrah’s Entertainment, which has made frequent acquisitions, to go back on the prowl for another casino company, analysts said.

And industry sources say Caesars Entertainment would be interested in any Strip properties MGM Mirage might be forced to sell, especially Treasure Island and the Mirage, which are close to its casinos.

But in the negotiations leading up to this current deal, Kerkorian indicated he would be loath to sell casinos on the Strip, according to a source familiar with the talks.

Kerkorian, who owns 53% of MGM Mirage, has long been a player in Las Vegas, working both sides of the tables. He developed a liking for playing craps while operating a small charter airline to the city in the 1950s and has been a key dealmaker in Las Vegas ever since.

He sold the land to the developers of Caesars Palace in the 1960s. Just four years ago, Kerkorian, who also controls L.A.-based studio Metro-Goldwyn-Mayer Inc., pulled off what until now was the biggest merger in the casino industry when he bought Wynn’s Mirage Resorts.

Rothman said the transaction was notable for how smoothly MGM integrated the Mirage properties into its operations. He expects Mandalay to be absorbed with the same ease, though MGM would need to be careful not to stifle Mandalay Bay’s hip image and culture.

Wall Street analysts are lauding the deal, saying that it would result in as much as $80 million in cost savings as MGM Mirage merges back-office operations, leverages its marketing campaigns across more hotel rooms and takes advantage of a centrally managed computerized reservations network.

Farley of UBS Securities said the deal could boost MGM Mirage’s 2005 earnings, now forecast by analysts to be about $2.40 a share, by 45 cents a share.

MGM Mirage would be expanding its presence as Las Vegas recovers strongly from its post-9/11 slump. More than 35 million people visited the city last year, making it one of the nation’s biggest travel destinations. A third of those visitors came from Southern California.

Shares of MGM Mirage rose 60 cents to $48.20 on Monday, while Mandalay’s shares fell 82 cents to $67.60. Analysts attributed the decline to the general sell-off in the stock market Monday and also speculated that some investors bailed out of Mandalay shares after an even higher offer from MGM Mirage failed to materialize. Both trade on the New York Stock Exchange.