Kerkorian’s Low-Ball Bid Wins Desert Inn
MGM-Grand Inc. announced Tuesday that it was selling the Desert Inn Hotel and Casino in Las Vegas to financier Kirk Kerkorian’s Tracinda Corp. for $130 million, far below the price it hoped for when it first put the property on the market a year ago.
MGM-Grand, which is 86%-owned by Kerkorian, plans to use the proceeds to develop a 5,000-room casino-hotel and movie theme park in Las Vegas, with construction scheduled to start this fall, said Michael Tennenbaum, vice chairman of Bear, Stearns & Co., the investment bank handling the sale.
MGM-Grand was aiming for $200 million or more when it first put the 41-year-old hotel on the market last summer. But Kerkorian’s bid was the only qualified offer MGM-Grand received in a 60-day auction that ended July 15, Tennenbaum said.
Tennenbaum said his firm had contacted about 300 potential buyers, but none made a “qualified bid.” A qualified bid, he said, had to be accompanied by a $10-million down payment, placed in escrow, and evidence that the bidder “had the financial capacity to complete the transaction.”
“Not one person put the deposit down. . . . No one had cash,” Tennenbaum said. He said that near the end of the auction, he received bids of more than $130 million but they were not accompanied by a deposit, and the bidders declined to put down a deposit when asked again to do so.
Kerkorian’s Tracinda Corp. has put down a $35-million non-refundable deposit, an MGM-Grand announcement said. Tennenbaum said Kerkorian would pay the balance of the purchase price in cash reaped from his earlier sale of MGM/UA.
Tennenbaum cited the Gulf War and the drying up of Japanese investment funds and capital markets worldwide as reasons for the low price. He noted that “a number” of other Las Vegas casinos have been sitting on the market without selling.
“The available capital for export to the U.S. from Tokyo has dried up. We didn’t have one bid from the Orient,” said Tennenbaum.
He also said the disappointing performance of smaller Las Vegas casinos such as the Desert Inn, known as a boutique casino for high rollers, also made it a less attractive property. “The DI is a 14,000-square-foot casino when it’s the 100,000-square-foot places that are doing well,” he said. He called the recent performance of the casino “lackluster.”
MGM-Grand originally put the Desert Inn up for sale last summer to raise capital for its planned 40-acre theme park. But although it had received initial bids for more than $200 million, none of the deals came through because the intervening Gulf War shook investor confidence, Tennenbaum said. As capital markets dried up, his firm stopped promoting the property earlier this year, then recommended an auction in May as a way to get the best price possible, he said.
As majority shareholder in MGM-Grand, Kerkorian “didn’t want to give (the Desert Inn) away,” Tennenbaum said. Seeing the slow market, Bear Stearns earlier this year suggested that Kerkorian buy it himself, Tennenbaum said. “We recommended Kerkorian buy the property at $130 million and we recommended a 60-day auction. . . . If nobody buys it, we know the price is fair.” Despite “aggressive” marketing, Tennenbaum said, no buyer with solid financing emerged. “We gave everybody an advantage over him” in bidding, Tennenbaum said.
MGM-Grand faced a choice in financing the theme park, Tennenbaum said: issue 11 million more shares, thereby diluting the value of current share holdings, or selling the property to Kerkorian.
“We believed this was the best course for the shareholders of MGM-Grand,” he said. Bear Stearns is also raising another $200 million in equity for the park. Kerkorian is buying half of the shares “and if nobody else wants the shares he’ll buy all of them,” Tennenbaum said.
The announcement of the sale was made after the close of trading on the New York Stock Exchange, where MGM-Grand shares finished the day unchanged at $12.
