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August 21, 2014

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Doing the math on possible sale of MGM properties

With a tsunami of unfilled hotel rooms likely to hit Las Vegas in 2010, it's time for a reality check on the MGM Mirage asset sale story.

Current and former gaming operators and private equity funds -- from just up the street and from around the world -- are likely taking a look at MGM Mirage properties. Like most everything else, they could be sold for the right price and some appear to be in play as the gaming company looks to correct imbalances in its balance sheet and continue funding its share of CityCenter.

Many of the would-be buyers, however, will likely turn out to be nothing more than window-shoppers. That's because these would-be deals likely won't pencil out to terms acceptable to MGM Mirage.

For MGM Mirage's Las Vegas Strip properties, the math behind this logic is as simple as it is compelling.

LVCVA numbers show the city now has some 141,000 hotel rooms. The recession has pushed the occupancy rate down to 83.9 percent in February, off from 89.4 percent at that time in 2008 and 90.3 percent in 2007. Just as troubling, the average daily room rate has tumbled from $135.67 in 2007 to $99.25 now.

These numbers aren't likely to improve much in the short term as corporations slash travel budgets and Americans travel less. Things aren't like 2007, when Americans could tap their home equity lines of credit or max out their credit cards for a quick trip to the gambling capital.

And with no quick turnaround foreseen for the U.S. economy, occupancy and room rates face further downward pressure as the room count grows substantially over the next 20 months.

With Aliante Station, Eastside Cannery, Encore, the M Resort, Palazzo and Trump Tower now open, the industry is bracing for the next wave of supply to enter the market. Think CityCenter, Cosmopolitan, Fontainebleau, the Planet Hollywood Towers by Westgate and the additions at the Hard Rock and Golden Nugget.

All told, the LVCVA projects another 15,777 rooms are in the pipeline to open through 2010. That's nearly double the number that opened last year and is the equivalent of about five Palazzos or eight Encores.

This helps explain why companies that desire a presence on the Las Vegas Strip may have to pass on this opportunity. Penn National Gaming, for instance, hasn't been willing to pay what MGM Mirage would likely demand for some of its Strip jewels. MGM Mirage, despite the financial pressures it faces, isn't auctioning its properties or holding a fire sale. Some assets may sell, but only under the right circumstances.

"We have not put a 'for sale' sign on any of our properties," said company spokesman Gordon Absher.

Bill Lerner, gaming securities analyst for Deutsche Bank, said Penn National will only do a deal that will boost its earnings. The likely prices MGM Mirage would demand in two markets Penn is interested in, Las Vegas and Detroit, are probably too high for that to happen, Lerner said.

"They're looking to pay (cash flow) multiples that are too low'' for MGM Mirage.

A more likely buyer is Wynn Resorts Ltd.

Steve Wynn, chairman and chief executive officer, said on Las Vegas Sun columnist Jon Ralston's "Face to Face" television show last week that he may be interested in the Bellagio and Mirage resorts that he developed before his Mirage Resorts was acquired by MGM Grand.

That's subject, of course, to price and the availability of financing.

"Hopefully taking advantage of our proper balance sheet, our cash reserve, our low interest rates and our lack of short-term maturity … we are in a position to be helpful to people on the Strip who would be better served by unbundling," Wynn said. "I think the unbundling of the Mirage company is a good idea. I thought that the putting together of those two companies (MGM Mirage and Mandalay Resort Group) was a bad thing."

Wynn just beefed up his balance sheet by about $175 million by selling stock to the public.

"I wouldn't be surprised to see that play out, especially in light of the recent capital raise" Lerner said of Wynn's interest in the MGM Mirage properties, adding he felt Bellagio would be the most logical of the two properties for Wynn to pursue.

If anyone outside of MGM Mirage knows where occupancy rates and room rates for the Bellagio are heading, its likely Steve Wynn and his team. Again, look for price to be the key factor here as Wynn has plenty of uses for that $175 million -- such as paying down debt -- besides contributing that money to a casino purchase deal.

Other potential buyers of MGM Mirage assets mentioned in published reports and in talks with gaming insiders include former Horseshoe Gaming owner Jack Binion, former Mandalay Resort Group executive Bill Richardson, Genting Group, Boyd Gaming, Pinnacle Entertainment and even the two companies that control Harrah's Entertainment, Apollo Management LP and TPG Inc.

Lerner said he didn't have first-hand knowledge of any of these individuals and companies talking to MGM Mirage about any deals, but in several cases they may make sense as buyers.

"I think Jack (Binion) is interested in reinvolving himself in an operating perspective," he said.

Boyd, he explained, remains interested in Station Casinos assets but could also be looking at the MGM Mirage opportunity as a way to re-establish its presence on the Las Vegas Strip even before resuming work on its idled Echelon project.

Another obvious possibility is for Boyd to buy MGM Mirage's interest in their joint-venture Borgata resort in Atlantic City. But again, price could be the issue.

With the Atlantic City market suffering like Las Vegas, and preparing to take a hit when Las Vegas Sands opens its Bethlehem, Pa., casino next month with 3,000 slot machines, Boyd may have little motivation to pay top dollar to buy out its partner.

Joseph Weinert, senior vice president at Spectrum Gaming Group, which researches the industry, said he hadn't heard if Boyd and MGM Mirage are talking about a deal in Atlantic City. In Atlantic City, just like Las Vegas, MGM Mirage has substantial land holdings that could come into play, too.

"It wouldn't surprise me if MGM Mirage would entertain a reasonable offer'' for its Borgata interest, Weinert said.

Andrew Zarnett, another Deutsche Bank analyst who covers debt securities, said MGM Mirage's interest in its Macau casino is in the same category as Borgata in terms of MGM Mirage having a partner (Pansy Ho) who potentially may be willing to deal.

"It comes down to price,'' he said.

Genting, Lerner said, is sitting on $1.5 billion in cash and is one of the more successful gaming operators in Asia. It has a big casino in Malaysia and like Las Vegas Sands is developing a gambling resort in Singapore.

"I would suspect they are looking at this environment," he said.

Lerner was skeptical of whether Apollo and TPG would be a buyer or buyers, given their exposure to Harrah's, the largest company in the industry. Harrah's has sustained losses as the recession trimmed cash flow -- just as its interest costs soared because of the Apollo/TPG buyout for $30.7 billion in 2008.

"I wouldn't rule it out," Lerner added.

He explained that the current potential availability of MGM Mirage properties -- and perhaps properties of other companies -- is likely attracting the attention of private equity shops from all over the country.

"I think you're going to see the complexion of the industry change notably," as new and established players do deals in the gaming industry's current cyclical trough, he said.

As for the big picture at MGM Mirage, Lerner confirmed what MGM Mirage is saying.

Potential asset sales are just one component of a multifaceted program. The plan is to realign its balance sheet to better match projected cash flow levels with its debt of $13 billion; as well as to keep financing flowing to complete CityCenter.

Besides looking at the sale of properties, MGM Mirage can explore refinancing its debt and could even trade debt for some assets. Lerner said it's also critical for MGM Mirage to get banks to relax their covenants governing the level of cash flow in relation to debt. This may require collateral, making the talk of asset sales that less important since some of those assets would be encumbered as security for the loans.

Based on recent progress, Lerner said: "I feel incrementally encouraged they'll be able to accomplish all of these things."

***

The Wall Street Journal is out with an analysis on why the stocks of Las Vegas Sands and MGM Mirage have done so well in recent weeks.

It appears, the Journal says, short sellers have been buying the stock of both companies not for investment purposes -- but rather to get out of a squeeze by covering their positions and limiting losses.

Based on data from shortsqueeze.com, some 23 percent of Las Vegas Sands' freely tradable stock, or float, and 30 percent of MGM Mirage's has been on loan to short sellers who borrowed it in the hopes the prices would fall. Any news pushing up the price of the stocks can cause a surge of buying, forcing short sellers to buy stock to cover themselves.

This may explain, the Journal said, why Las Vegas Sands stock has more than tripled to $4.44 a share and MGM more than doubled to $5.30 from their March lows.

The Journal cleverly noted a downside to all of this: "A reason people may not flock to Vegas: They get the same thrills and spills just watching their stocks."

***

Harrah's is saying "Let's play ball!" Just in time for their home openers, the casino operator announced sponsorship deals at Citi Field, new home of the New York Mets; and at the Chicago Cubs' Wrigley Field.

Centurion Guards from Caesars Atlantic City have a new home at Citi Field as Harrah's Entertainment becomes a Mets signature partner. The new Caesars Club located at Citi Field opens officially on April 13.

Centurion Guards from Caesars Atlantic City have a new home at Citi Field as Harrah's Entertainment becomes a Mets signature partner. The new Caesars Club located at Citi Field opens officially on April 13.

These deals promote two Harrah's properties: Caesars Atlantic City and the Horseshoe in Hammond, Ind., just down the road from Chicago.

The Mets are moving from the old Shea Stadium to Citi Field, where the home opener is Monday and Harrah's will have extensive signage, promotional events and a Caesars Club offering food and beverage options that Harrah's says will set a new standard for dining at sports and entertainment venues. The deal extends to Mets' minor league affiliates the St. Lucie (Fla.) Mets and the Brooklyn Cyclones.

In Chicago, the Horseshoe will reveal its new left-field rooftop billboard at the Cubs' home opener Monday.

The deals have resulted in predictable, unflattering comments associating Harrah's with sports betting -- something that professional sports leagues publicly distance themselves from. They do so despite legal and illegal wagering on games driving interest in their sports.

A posting on Onlinecasinoadvisory.com says: "Observers say the stance against online gambling by sports leagues becomes more and more hypocritical. ... Legal sports books at Nevada casinos owned by Harrah's take daily action on games featuring the Cubs, Mets, and all the other Major League Baseball teams. The need to protect integrity in sports, they say, seems to end exactly where sports league wallets begin."

A commentator on Bizofbaseball.com said: "Somewhere, Pete Rose is shaking his head."

In New York, a Villagevoice.com commentator said: "They aren't taking bets on games yet, but we're sure you'll find someone at Caesars Club who'll take a little action on the game."

So, in light of the death of Los Angeles Angels pitcher Nick Adenhart at the hands of an alleged drunken driver, where is the outcry against alcohol companies sponsoring professional sports?

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