Casino Buyout Plan Goes Bust
A proposed deal that would have created the nation’s largest casino company broke apart Friday after Mandalay Resort Group rejected a $4.85-billion bid by MGM Mirage.
Mandalay balked at the last minute when MGM Mirage said it wanted the option to walk away from the deal if regulators forced the merged company to sell off casinos because of antitrust concerns, said Glenn Schaeffer, president and chief financial officer of Las Vegas-based Mandalay.
“This became a different deal than the one we started talking about a week ago,” Schaeffer said. MGM Mirage would have had up to 15 months to unwind the transaction, he added. In that event, according to one source familiar with the talks, MGM Mirage would have paid Mandalay a $100-million breakup fee.
MGM Mirage executives didn’t respond to requests for comment Friday.
The companies disclosed June 4 that they were in talks to craft what would have been the biggest casino deal ever. MGM Mirage, which owns the Bellagio, MGM Grand and four casinos on the Las Vegas Strip, offered $68 in cash for each share of Mandalay, owner of Mandalay Bay, Circus Circus and two other Strip properties. In addition, the pair jointly own the Monte Carlo casino. Including assumed debt, the offer totaled $7.65 billion.
Antitrust experts said concerns that the merged venture would have too much clout in the Las Vegas market were valid.
The combined company would have controlled roughly half of the hotel rooms and casino space along the Strip. It would have operated 11 hotels with a total of 36,500 rooms, 22,000 slot machines and 1,050 gaming tables along about four miles of the street, dwarfing other competitors in the market.
Including its casinos in Reno and Laughlin, Nev., and operations in New Jersey, Mississippi, Michigan and Australia, the venture would have had $6.8 billion in annual sales, surpassing Caesars Entertainment Inc. and Harrah’s Entertainment Inc. as the largest gaming company in the U.S.
The Federal Trade Commission, which would have vetted the deal for antitrust issues, probably would have raised questions about how the deal would have affected the typical “party-going gambler” who makes up the bulk of the casino customers in Las Vegas, said Mike Cowie, a former senior litigation counsel with the agency.
“That’s where problems might arise,” said Cowie, now an antitrust attorney with Howrey, Simon, Arnold & White in Washington.
The merger also would have triggered a review of “market concentration” by the Nevada Gaming Control Board, said Dennis Neilander, the agency’s chairman.
In recent days, industry executives had speculated that regulators might require the combined company to shed at least some of its Vegas holdings to satisfy antitrust concerns.
Schaeffer said he believed that MGM Mirage could have overcome the regulatory issues. But the Mandalay board, meeting Friday in Las Vegas, was reluctant to lock the company into an uncertain deal with MGM Mirage for such a long period.
“After just reporting all-time-record quarterly results, we just couldn’t do that to our shareholders,” Schaeffer said.
On June 3, Mandalay said that its first-quarter profit nearly doubled to $87.3 million and that revenue rose 18% to $729.4 million.
People familiar with the talks said the $68-a-share price also was an issue. Over the last week, several analysts had said Mandalay was worth more, especially in light of the earnings report.
Schaeffer, however, said the two sides got tripped up by the regulatory issues before negotiations over a final price took place.
Schaeffer declined to speculate whether MGM Mirage would make another run at the company or whether he expected a new suitor to emerge.
“It’s been an interesting foray for the last week, but now we’re just going to go on with our business,” he said. That includes deciding whether to build a hotel on the south side of the flagship Mandalay Bay Resort.
Although MGM Mirage might make a new bid for Mandalay, there aren’t many other gaming companies that have the financial wherewithal to pull off such a deal, said Patricia Wright, an analyst with Fitch Ratings in New York.
Caesars Entertainment doesn’t have the cash flow, she said, and Harrah’s Entertainment is reluctant to get into a bidding war with billionaire Los Angeles financier Kirk Kerkorian, who controls more than 53% of MGM Mirage.
MGM Mirage could go after one of the other two companies, depending on what strategy it wants to pursue, Wright said. An acquisition of Caesars would give it more heft on the Strip, whereas a merger with Harrah’s would allow it to diversify into other gambling markets.
Kerkorian has shown a penchant for wheeling and dealing along the Strip, and no one would be surprised if he surfaced with another deal.
“Kirk Kerkorian is perhaps one of the smartest investors in the world,” said Tim Poster, who bought the Golden Nugget casino in Las Vegas from MGM Mirage last year. “The fact that he wanted to ‘double down’ in this industry shows just how strong the prospects are.”
Kerkorian, 87, pulled off what now remains the largest merger in the casino business when his company paid $4.4 billion for Steven Wynn’s Mirage Resorts Inc. in March 2000 to create MGM Mirage. He then sold off the Mirage properties in downtown Las Vegas and Laughlin.
The Mandalay bid was true to Kerkorian’s strategy: bulking up in Las Vegas, especially the prime areas of the Strip, Wright said. She added that Kerkorian’s instincts regarding the gaming business had been solid.
“Las Vegas was heavily stress-tested after the 9/11 period, and not only did it survive, it eventually thrived,” Wright said.
Mandalay’s stock has risen 13.5% since the buyout offer was disclosed, closing at $68.42 on Thursday. U.S. markets were closed Friday in observance of a national day of mourning for former President Reagan, but analysts expect the stock to sag in early trading Monday as the takeover premium evaporates.
MGM Mirage’s shares rose more than 3% after its bid was announced. Both trade on the New York Stock Exchange.
