Mirage investors are advised to hold on

David Strow

Thursday, Feb. 24, 2000 | 11:20 a.m.

Following MGM Grand Inc.'s unsolicited takeover offer for Mirage Resorts Inc., Wall Street analysts are urging investors to hang onto their Mirage Resorts stock -- even if they're uncertain whether the deal will go through.

With a lot of uncertainty and various scenarios possible, investors may also want to brace themselves for a wild ride.

On Wednesday morning, MGM Grand offered a $17 per share deal to Mirage Resorts' board, a considerable premium over Tuesday's closing price of $10.88. Mirage remained silent this morning on the takeover offer.

Despite the premium, many analysts doubt $17 per share will be enough to convince Mirage Resorts Chairman Steve Wynn to give up control of the company he's ruled so tightly.

"I think Steve Wynn will have a hard time accepting the offer as it stands," said David Anders, gaming analyst with CS First Boston. "He believes his company is worth more.

"The company is worth a minimum of $17 to a buyer."

This morning on Wall Street, Mirage fell 38 cents, to $14.13. MGM Grand fell $2.63, to $39.19.

Anders believes the Mirage-MGM announcement was welcome news for the entire gaming sector, which had been sliding for the first seven weeks of 2000.

"If Mirage ends up being acquired by MGM ... or even some type of recapitalization, the growth plans of Mirage will be curtailed, and that leads to an overall improvement of valuation in the industry," Anders said. "The recent catalyst for the sell-off was Mirage's announcement that they'd build a 1,300-room tower next to the Bellagio.

"Investors began thinking, 'These guys can't stop building. There's no such thing as free cash flow in the industry."'

Analysts say if anyone tries to fight MGM Grand for control of Mirage, it would be Harrah's Entertainment Inc., which has vast geographic reach, but only two properties in Las Vegas. Moreover, the company has few high-end properties in its portfolio.

"Rolling Mirage into the Harrah's portfolio would just be a home run," Anders said. "They're losing customers from their riverboat markets. They don't stay at Harrah's or the Rio, because they're much more impressed with the Mirage or the Bellagio. They could retain those customers."

Harrah's isn't trying to discourage those rumors.

"We are interested in any strategic consolidations that add value for our shareholders," said Harrah's spokesman Gary Thompson.

But Joseph Coccimiglio, gaming analyst with Prudential Securities, isn't convinced Wynn will sell, either to MGM Grand or Harrah's. He believes the MGM Grand offer has less than a 25 percent chance of succeeding.

"That's because of the difficulty in figuring out the control issue," Coccimiglio said. "That would be an issue, no matter what combination you have."

If Wynn resists a takeover, he would need the support of institutional shareholders, who control about 60 percent of the company's stock. Twenty-five percent of the stock is controlled by four institutional investors, compared to 16 percent held by Wynn and Mirage Resorts' board of directors.

Dave Ehlers, chairman of Las Vegas Investment Advisors, believes it wouldn't be easy convincing those shareholders that the MGM Grand deal isn't a good buy. Because of pressure from these investors, Ehlers said Mirage is a stock to buy.

"Shareholders are angry out there," Ehlers said. "People on Wall Street are a restless bunch of campers. When there's a lot of people who are angry, that sets the stage for something to happen.

"At the very least, there are those that believe this will cause Mr. Wynn's company to re-examine the concept of building shareholder value. At $14 (per share), that kind of desire is in the best interest of shareholders."

But any attempt to take over the company against the wishes of Mirage Resorts' board will be a tough sell to Nevada gaming regulators.

"Generally, the (Gaming Control) Board and the (Gaming) Commission do not like to see hostile takeovers," said Steve DuCharme, chairman of the Nevada Gaming Control Board. "They're disruptive to ongoing businesses, generally costly to both (parties), and the emerging parties are generally less viable on a going forward basis.

"It burns up resources in the acquisition or attempted acquisition that could be better spent on a growing company or increasing shareholder value."