Kerkorian bids for Mirage

David Strow

Wednesday, Feb. 23, 2000 | 11:45 a.m.

Los Angeles billionaire Kirk Kerkorian's MGM Grand Inc. today offered to buy Mirage Resorts Inc. for $5.4 billion -- a deal that would be the largest in gaming industry history if completed.

In a letter sent to Mirage Resorts Chairman Steve Wynn this morning, MGM Grand Chairman J. Terrence Lanni called the offer a chance to create "the undisputed leader in our industry by any measure."

"It is our intention that this offer be accomplished on a friendly basis," Lanni said.

MGM Grand, based in Las Vegas, is offering $17 per share for Las Vegas-based Mirage Resorts, either all in cash or a combination of cash and stock -- a bid worth $3.26 billion. That's a premium of 56 percent over Mirage Resorts' Tuesday closing price of $10.88, but it's also well below its 52-week high of $26.37, reached in May. MGM would also assume Mirage Resorts' $2.1 billion debt.

MGM Grand's offer will expire at 5 p.m. March 8, Lanni said.

The announcement sent Mirage Resorts shares soaring. In early afternoon trading today on Wall Street, it was at $14.63, up $3.75 -- a 35 percent increase -- on extremely heavy trading volume. MGM Grand rose 75 cents to $41.13.

That activity spilled over to other gaming stocks as well. Through midday, Mandalay Resort Group rose 69 cents to $14.75, Harrah's Entertainment increased 88 cents to $21.50 and Park Place jumped 50 cents to $10.75.

The move would give MGM Grand a dominant share of the Strip market, with six properties. The merged company would be particularly powerful in the high-rollers' market, where Mirage Resorts and MGM Grand are two of the largest players.

"We have the best balance sheet in the gaming industry. We've successfully acquired companies in the past, and we have a deep management team that can manage more properties than we currently own," said Jim Murren, president and chief financial officer of MGM Grand. "We've far exceeded Wall Street earnings in the past year and a half, and we intend to continue that great streak.

"We've looked at a variety of opportunities in this industry, and we believe the combination of MGM and Mirage would be a checkmate. It would result in the highest quality assets, people, growth opportunities and financial might in our industry."

Observers say Wynn has strong respect for Lanni and MGM Grand's top management. But whether that will be enough to induce him to give up control of the company he controls so tightly is still unknown.

"Investors would love for this transaction to happen," Joe Coccimiglio, gaming analyst with Prudential Securities, said. "The question is, will Steve Wynn let this happen? I don't know.

"There's very little doubt that the two companies together would be a great company, but is (Wynn) willing to give up control?"

In his letter to Wynn, Lanni said all members of Mirage Resorts and MGM Grand's boards would be named to the combined company's board.

At this point, Mirage Resorts is mulling the offer -- and saying little.

"The unsolicited proposal by MGM Grand will be considered by the board of directors of Mirage Resorts Inc. in a meeting to be held in the near future," the company said in a statement this morning.

It had no further comment.

Jason Ader, senior managing director with Bear Stearns & Co., estimates the combined company could see $150 million a year in savings by combining their operations.

Another attraction for MGM Grand may be the companies' separate plans to enter the Atlantic City market. Both Mirage Resorts and MGM Grand have announced plans to develop there, but Mirage Resorts is well ahead of MGM Grand in the race to develop in that city and has a better location.

Mirage Resorts stock has fallen nearly 59 percent since last summer, as the company's newest resort, the Beau Rivage in Biloxi, Miss., performed well below expectations. And though the $1.6 billion Bellagio hotel-casino has performed well since its 1998 opening, topping $1 billion in revenues last year, it has been draining business from other company properties -- particularly the Mirage hotel-casino.

"At the end of the day, MGM is offering a fair price," Ader said. "I don't think, based on fundamentals, that Mirage (Resorts) would have achieved that price ($17) in two to three years."

Mirage Resorts' struggles started rumors last year that it would be the target of a takeover attempt.

That talk began in earnest last September, when Kerkorian -- owner of 70 percent of MGM Grand's stock -- bought 10 million shares of Mirage Resorts stock. Both sides denied the takeover speculation the purchase set off.

Responding to that speculation, Wynn said in September that he would block any hostile takeover attempt of the company.

"You can't buy Mirage," Wynn told Bloomberg News at the time.

Kerkorian quietly sold the Mirage Resorts shares two months later.

"The driver of this deal ... is Kirk Kerkorian," Ader said. "He's the best investor in the casino industry, he realized (Mirage Resorts) was undervalued ... and saw a real exciting opportunity for his shareholders."

Ader doesn't believe MGM Grand would try to force the issue against the will of Wynn or Mirage Resorts' board.

"My sense is that MGM will not attempt to acquire this company in a hostile takeover," Ader said. "They've told us that point-blank."

That's suggested by the March 8 expiration date of the MGM Grand offer. That date is a full two weeks before the annual meeting of Mirage Resorts shareholders in Las Vegas -- suggesting MGM Grand is not yet attempting to set off a proxy battle for the company.

Moreover, MGM Grand did not purchase any Mirage Resorts stock before announcing its offer. Typically, a company will take a sizable stake in a target company before launching a hostile takeover bid.

Though unsolicited takeover offers often lead to counterbids by rival companies, analysts aren't yet convinced Mirage Resorts is in play. The largest company in the industry, Park Place Entertainment Corp., just completed a $3 billion takeover of Caesars World Inc.

"Mandalay (Resort Group) is already overleveraged, and Park Place just digested Caesars, so they're not going to go after Mirage," Coccimiglio said. "Other companies just don't have the financial wherewithal."

Ader agreed.

"I just don't see it (another bidder)," Ader said. "The best synergies in the business are realized through an MGM-Mirage combination, through that shared high-end market that they both compete for."

If a second suitor appears, Coccimiglio said, it might be Harrah's Entertainment, one of the most geographically diverse companies in the gaming industry -- but one without a huge presence in Las Vegas.

"That could make some sense," Coccimiglio said. "I know Wynn and (Harrah's Chief Executive) Phil Satre get along. Of all the industry's executives, those are the two that Wynn most gets along with ... Lanni and Satre."

Even if MGM Grand is outbid by a new rival, Ader believes the company will still be willing to go higher in its quest for Mirage Resorts.

"I don't think MGM puts all of its cards out on the table with the first move," Ader said. "This would be accretive to earnings up to the low $20s (per share). But I don't see (a higher bid) right now, no."

But Murren said MGM Grand would be cautious.

"We have (tried) to be extraordinarily shareholder-friendly," Murren said. "We will not do anything we believe would negatively impact our shareholders."