MGM Grand looking for new deals

Gary Thompson

Wednesday, Feb. 2, 2000 | 11:32 a.m.

Kerkorian's studio

Agent 007 and a massive restructuring effort helped drive Metro-Goldwyn-Mayer Inc. to its strongest quarter in a dozen years, the studio said Tuesday.

Kirk Kerkorian's MGM studio recorded its second consecutive profitable quarter during the final three months of 1999, thanks to the impact of the new James Bond flick, "The World is Not Enough," improved video results and a corporate overhaul.

For the quarter ended Dec. 31, Santa Monica, Calif.-based MGM earned $15.2 million, 8 cents per share, on revenues of $372.2 million. This compares with a loss of $43.7 million, or 41 cents, on revenue of $383.4 million in the 1998 fourth quarter.

Bear Stearns & Co. raised its rating on the stock of billionaire Kirk Kerkorian's MGM Grand Inc., saying selling pressure has abated and the company's growth opportunities -- including a possible "major acquisition" -- are bright.

Meanwhile, MGM Grand President Jim Murren acknowledged that the extraordinary success of MGM's acquisition of Primadonna Resorts Inc. has whetted the company's appetite for additional purchases, but said that for the time being Las Vegas-based MGM Grand's depressed stock price represents the best buy in the gaming industry.

Bear Stearns Senior Managing Director Jason Ader boosted MGM stock to a "buy" rating based on a 23.6 percent price drop since Nov. 9 coupled with his belief that the company "is poised to deliver several more quarters of impressive earnings growth." He set a target of $58 to $60 a share, about 40 percent above its current price.

Ader said MGM Grand should enjoy a strong first quarter due to higher convention bookings, "a very good Chinese New Year and a solid entertainment calendar. In addition, we believe both the Las Vegas and Detroit markets should provide meaningful growth opportunities in 2000."

The analyst noted MGM Grand's aggressiveness in creating shareholder value, its 2-for-1 stock split effective later this month and its new quarterly dividend.

"We would also not be surprised if MGM Grand announced a major acquisition in 2000," Ader said in a research report.

"Some of the potential acquisition targets that have been rumored include Aztar Corp., the Aladdin, or potentially, the Empress portfolio," he said.

Aztar owns the Tropicana in Atlantic City -- a key market in which MGM's development plans have been stymied by land-acquisition problems -- as well as the Las Vegas Tropicana, an under-utilized 43-year-old property right across Tropicana Avenue from the MGM Grand hotel-casino. An Aztar acquisition would give MGM Grand control of three of the four corners at the Strip and Tropicana.

The Aladdin isn't for sale, and its owners -- developer Jack Sommer and London Clubs International -- insist they have money to complete construction of the $1.3 billion resort. But it's in a prime location on the Strip, near Bellagio and adjacent to Paris Las Vegas, two of the newest mega-resorts in town.

Empress Entertainment Inc. is a privately held company that owns riverboat casinos in Hammond and Joliet, Ill., that serve the booming Chicago gaming market.

"MGM management has indicated that it would like to build upon its presence in Las Vegas and is attracted to the Chicago market," Ader said. "MGM emphasized that any potential acquisition must be 5 percent accretive immediately (before cost savings and/or debt refinancings), and that it would prefer it to be "bite size," which they described as similar to the Primadonna deal.

"Given the success MGM had with the Primadonna deal -- which added 40 to 42 cents in earnings per share in only 10 months -- we believe there are a number of attractive candidates that would fit the above-mentioned criteria," he said.

"MGM Grand has also not ruled out engaging in management contracts. We believe the company is looking at both domestic and international opportunities including the potential to manage Native American casinos in California."

"Jason's doing what a good analyst does, putting two and two together," Murren said Tuesday. "Sometimes you come up with four, sometimes six or eight.

"If you listen to the rumor mill, we've bought almost every company in gaming at some point over the past few years. That's because we have the best balance sheet in the industry and are very efficient managers of assets.

"When you have a strong balance sheet, high margins and are a growth company, acquisitions are a tool for enhancing shareholder value.

"Obviously, we made an extraordinary acquisition with Primadonna," Murren said. "I think it's been the most successful acquisition in the history of gaming. The natural speculation is that we'd continue to buy more companies.

"But I'd caution people by saying acquisitions are only part of the way a company can grow," Murren said. "We are looking at management contracts because we like the risk-reward profiles they represent."

The risks -- little or no upfront capital requirements -- are typically far outweighed by the rewards reaped from management fees. MGM's South African management deals required no investment by the company and generate about $10 million a year in revenue.

"We are looking at a variety of Native American and non-American contracts throughout the world," Murren said. But he insisted that the company's "real focus" these days is on the values and opportunities within MGM Grand itself.

"Improving the assets we already own are always a priority, as well. We've still got a lot more tricks up our sleeves at MGM Grand, New York-New York and the properties in Primm, some very, very high return investments we'll be announcing soon.

"We bought back more than a half billion dollars of our own stock within the past year and a half, which speaks quite loudly what type of investment we think our own company is," he said.

Murren ticked off MGM Grand's accomplishments.

"In the past two years, we've bought back 6 million shares at $35 a share, 6 million more at $50 a share, have split our stock, declared a quarterly dividend, made an accretive acquisition, exceeded Wall Street's earnings estimates for five quarters in a row -- and our stock is down more than 20 percent.

"We chuckle about it internally, believing the market has done us an enormous favor. We bought back shares at $50 and we like them even more at $43," Murren said.

"We have a voracious appetite for our stock, and we're putting our money where our mouth is."