MGM Grand quarterly earnings jump 50 percent

Gary Thompson

Thursday, April 22, 1999 | 11:07 a.m.

MGM Grand Inc. said today first-quarter revenue, profits and earnings soared to record levels due to booming Las Vegas business, improved margins and the acquisition of Primadonna Resorts Inc.

The blow-out performance included a 50 percent jump in per-share operating net, a 53 percent rise in cash flow, record table-game and room revenues and all-time high occupancy rates.

MGM said net income before pre-opening and accounting charges rose to $23.9 million, or 43 cents a share, from $16.3 million, or 28 cents a share, in the 1998 first quarter. Revenue soared to $251.4 million from $179.8 million.

The operating net exceeded analysts estimates of 34 cents a share. However, one-time costs related to Detroit and Atlantic City developments and a charge incurred for an accounting change trimmed net to $9.4 million, or 17 cents a share.

Operating cash flow, or earnings before interest, taxes, depreciation and amortization (EBITDA) increased to $72.7 million from $47.5 million in the 1998 first quarter, as the company's cash-flow margin rose to 29 percent from 26 percent.

"MGM had both cannons working in the first quarter," said Ladenburg Thalmann & Co. gaming analyst Andrew Zarnett.

"On the acquisition side, they successfully integrated Primadonna, offering investors up to $10 per share of incremental value. And the strength of Las Vegas significantly benefited them.

"Of particular importance, the company positioned itself well by building a world-class convention facility to take advantage of the overwhelming increase in visitor volume during the past three months.

"They did a terrific job," Zarnett said.

First-quarter cash flow at the flagship MGM Grand rose 33 percent to $46.1 million from $34.6 million, fueled by a 20 percent revenue gain to $195.1 million.

At the MGM, revenue per available room jumped to $105 in the latest quarter from $91 a year earlier, while the occupancy rate rose to 96.5 percent from 90.5 percent.

Casino, food and beverage and entertainment revenues rose, as well, despite a 15 percent decline in baccarat drop.

The company's acquisition of Primadonna Resorts, which closed March 1, also contributed to the performance. The merger gave MGM the 50 percent interest in New York-New York it didn't already own, as well as three additional hotel-casinos in Primm, Nev., and two golf courses nearby.

MGM said EBITDA and revenues were essentially flat at New York-New York compared with the first quarter last year, though the cash-flow margin remained a robust 47 percent. MGM also refinanced nearly $158 million of New York-New York bank debt to take advantage of the parent company's lower borrowing costs.

The three Primm hotel-casinos contributed $6 million of cash flow in March, the first full month of ownership, for a 30 percent EBITDA margin. MGM Grand President Alex Yemenidjian said the acquisition contributed about 5 cents a share to net income in the month.

"We were expecting an accretion of about 5 percent from the acquisition and now believe our annualized accretion will be more in the line of 20 to 25 percent per year," Yemenidjian said during a conference call with analysts today.

"Assuming a multiple of nine times cash flow, that means we've added about $9.40 per share in value to the company just with this acquisition," he said.

"We've sold about $12.8 million of Primadonna's superfluous assets. Looking at the adjusted purchase price and the cash flow, we believe the return on investment of this acquisition should be about 23 percent."

"Tack on $17.1 million of cash-flow savings, $12.5 million of depreciation and interest savings, and we've increased net about $30 million per year with the transaction.

"We've also reduced total debt of the properties by about $57 million already. We're extremely pleased with the acquisition and see more savings and revenue enhancements in the future."

At the end of the latest quarter, MGM signed a five-year $230 million bank credit facility to finance construction of its temporary casino in Detroit.

"We are on track and on schedule with construction there and if the license process moves ahead as expected, we hope to open the temporary facility in the third quarter of this year," Yemenidjian said.

"We are very excited and optimistic about the Detroit market in general and our property there in particular. It's a gorgeous facility and looks more like a permanent facility than a temporary one."

Yemenidjian expressed frustration over the long condemnation process under way in Atlantic City, where MGM's plans to build a $750 million hotel-casino are being held up over the acquisition of a final 1-acre site.

In Las Vegas, the company's outlook remains strong for the rest of the year, MGM Chief Financial Officer Jim Murren said.

"The conference center is completely bursting at the seams for 1999, which will benefit mid-week occupancy," he said. "We're looking at very good occupancy at this property throughout the year. Our bookings are nicely above this time last year.

"And at New York-New York, the strong first-quarter occupancy trends seem to be continuing through the second quarter."

Yemenidjian, Murren and MGM Grand Chairman Terry Lanni declined to comment on potential buyers for the Caesars World properties Starwood Hotels & Resorts Worldwide has put on the auction block. Park Place Entertainment and Mirage Resorts are among possible buyers.

But, responding to a question about the delays in New Jersey, Lanni said: "We're capable of buying Caesars Atlantic City, and don't rule anything in or out. We'll do what's in the best interest of our shareholders."

As for potential competition from the ultimate Caesars Palace owner, Yemenidjian said the entire Las Vegas market could benefit.

"If you have a competitor who's very rationale and who doesn't adopt kamikaze tactics, it can be good for everybody," he said. "It depends on the policies adopted by whoever ends up owning Caesars."

Yemenidjian was combative about the growing competition for quality performers as the gaming industry moves toward an increasing emphasis on entertainmment.

"Ever since the MGM Grand opened, our entertainment has been second to none and it's a free-fall to the next-best entertainment in town," Yemenidjian said. "We'll continue to have the best entertainment even in a competitive environment because of the power of the MGM brand and the high-powered contacts (entertainment director) Richard Sturm has."

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