Kerkorian buys stake in Mirage

Gary Thompson

Thursday, Sept. 16, 1999 | 11:13 a.m.

Billionaire Kirk Kerkorian has purchased a stake in Mirage Resorts Inc. as a "passive investor," gaming analyst Jason Ader said today.

"We view Kerkorian as one of the best investors, period, with a great track record in gaming," said Ader, senior managing director of Bear Stearns & Co. "Although Kerkorian has indicated that the Mirage investment is passive, he is not one to sit quietly if stock-price performance languishes."

The extent of Mirage investment by Kerkorian isn't known, though it has been rumored for about a week that he had bought a sizable stake in the company. If the reclusive investor winds up with more than 5 percent of Mirage shares, he'll have to file a disclosure statement with the Securities & Exchange Commission.

Kerkorian owns about 70 percent of Las Vegas-based casino operator MGM Grand Inc., whose stock has climbed sharply in the past year, and controls the Metro-Goldwyn-Mayer Inc. studio in Hollywood. Kerkorian financed his repurchase of the studio company in part through an investment in Chrysler Corp. when the automaker's stock was viewed with disdain by most investors.

Mirage stock is one of the few casino operators' issues that hasn't climbed this year due to a resurgence of visitor volume growth in Las Vegas. In fact, Mirage has lost about half its value in the past year, and Kerkorian clearly believes the stock is undervalued at the current price.

The Kerkorian purchase is one of several reasons Ader gave for upgrading his rating on Mirage stock to "attractive" from "neutral" this week following meetings in Las Vegas with Mirage Chairman Steve Wynn and other executives of the company.

The analyst said Mirage plans to buy back some of its own shares and may invest in Indian gaming casinos in California to counter what Wynn sees as a major threat to Nevada casino operators over the next two years.

A Mirage official could not be reached for comment on Ader's observations.

"Wynn appeared to give Native American gaming in California a much higher degree of relevance than what is currently prevalent in the investment community," Ader said. "He thinks the Native American tribes will move quickly and have good access to capital in this market, enabling them to build competitive gaming products.

"If the threat becomes significant enough to Las Vegas, Mirage indicated that it would consider investing and managing California Indian gaming facilities if the deals were economically compelling."

Wynn also indicated a stock buyback may be the best use of the company's free cash flow at current price levels, Ader said. "We wouldn't be surprised to see them announce and consummate a significant stock repurchase in the near future."

"We believe the worst is now behind Mirage in Mississippi as business trends have been improving," Ader said.

Based on its initial run rate, the new Beau Rivage hotel-casino in Biloxi had been expected to generate about $50 million in earnings before interest, taxes, depreciation and amortization -- commonly known as cash flow-- since opening last spring. That would have been a disappointing return on the investment Mirage made in the Gulf Coast market.

But Ader said Wynn and Bellagio President Bobby Baldwin, who is serving as the company's temporary chief financial officer, told him Beau Rivage "is now operating closer to $70 million and will likely be on a $90 million run rate over the next six months."

"In addition, trends in Las Vegas are strong and we expect good third- and fourth-quarter earnings driven by special events, conventions and Millennium travel," Ader said.

"Both Wynn and Baldwin indicated that they are comfortable with Wall Street analysts consensus estimates of earnings of 17 cents a share for the third quarter and 23 cents a share for the fourth quarter," he said.

The Mirage executives also indicated the company's baccarat business is getting strong as regional economic conditions throughout southeast Asia continue to improve, Ader said.

"We believe Mirage shares should trade at eight to 8.5 times our 2000 cash flow estimate of $631 million, implying an asset value of $16 to $18 a share," he said. Mirage stock traded this morning at $14.44, up 44 cents from Wednesday.

Ader indicated recent investor complaints over a lack of adequate and timely financial disclosure have been heeded by Mirage executives, who said they'd report earnings 15 to 20 days after the end of each quarter rather than the normal six to eight weeks later.

Mirage still won't disclose property-by-property results in its company-issued earnings statements, though it will do so "if analysts and/or investors care enough about the properties and their performance to actually go and visit the property presidents," Ader said.

"They will not give information to people over the phone about individual property statistics," he said. But, "if an individual cares enough about the performance of the Mississippi property to go there and meet with (Beau Rivage President) Barry Shier, Barry will provide property-level information."

Ader said Mirage has retained an executive search firm to find a permanent replacement for CFO Dan Lee, who left the company a few weeks ago.