Casino observers speculate on new scenarios for Mirage, Wynn

David Strow

Friday, Feb. 25, 2000 | 11:13 a.m.

As Mirage Resorts Inc. remains silent on MGM Grand Inc.'s $5.4 billion takeover offer, Wall Street analysts and Las Vegas casino observers are busy trying to guess Mirage Chairman Steve Wynn's next move.

Though Wynn may begin negotiating a higher price with MGM Grand, Wall Street is buzzing with talk of new bids for the Las Vegas company -- particularly from Harrah's Entertainment, seen as a possible "white knight," or Park Place Entertainment, a company with a history of voracious acquisition activity.

But Wynn is known for his willingness to roll the dice. That has some on Wall Street speculating he'd take the risky move of taking Mirage Resorts private in a leveraged buyout -- and that Carl Icahn, owner of the Stratosphere hotel-casino, might be willing to help him.

"The problem with trying to second guess this is, they're very smart guys with a lot of advisers," said Shannon Bybee, executive director of UNLV's International Gaming Institute. "You're doing a lot of guessing, and there's a variety of alternatives."

One strong possibility, some argue, is that Wynn will simply tell the world that Mirage Resorts is not for sale, as he did when MGM Grand controlling shareholder Kirk Kerkorian took a stake in Wynn's company last year.

One analyst, Joe Coccimiglio of Prudential Securities, has predicted that's probably what will happen, saying the odds of a buyout by MGM Grand are less than 25 percent.

"We would not be surprised to see the status quo," Lehman Bros. analyst Stuart Linde wrote in a report. "Steve Wynn has been credited with building the gaming industry of his dreams. Mirage is his vision and it is unlikely that he would want to lose control of the company."

Wynn has incurred the wrath of many investors on Wall Street over the past several months, over issues ranging from the poor performance of the Beau Rivage in Biloxi, Miss., to the sudden departure of Chief Financial Officer Dan Lee. Combine that with sometimes rocky dealings with analysts and investors, and the stage was set for Mirage Resorts' slide to a 52-week low earlier this month.

That would certainly be raised by shareholders at Mirage Resorts' annual meeting March 23, should Wynn reject the offer. And it could lead to more shareholder lawsuits against the company.

But Wynn could effectively argue that the stock is simply suffering through a temporary low cycle, and that Mirage Resorts will recover, said Bill Eadington, director of the Institute for Gambling and Commercial Gaming at the University of Nevada-Reno. Until 1998, Mirage Resorts was the darling of the gaming industry, Eadington said.

"Steve Wynn has proved pretty resilient as an operator," Eadington said. "The value of $17 (per share) does look awful cheap for that stock. It's worth well more than $17 per share, and he's gotten beat up for the wrong reasons."

Such a move would also allow Wynn to remain the undisputed leader of Mirage Resorts, a factor no one doubts is critical to Wynn.

But Dave Ehlers, chairman of Las Vegas Investment Advisors, believes Wynn could be setting himself up for a damaging proxy battle for control of Mirage Resorts if he chooses to do nothing.

"Everyone expects that (MGM Grand) will get turned down, and it will be a non-event," Ehlers said. "But I don't think it will be a non-event. You've got to presume there's a lot of people out there who are angry, and that sets the stage for something to happen."

"This bid puts the board of Mirage, and its CEO Steve Wynn, in an awkward position and nearly forces Mirage to evaluate all strategic alternatives or face a potential massive wave of selling pressure," wrote CS First Boston analyst David Anders in a report.

If the company does not sell, Mirage Resorts would be pressured to sell off some of its assets to help recapitalize the company and support its stock price, analysts say. Another possibility is that Wynn would go on the hunt for acquisitions of his own, Bybee said.

Logical targets include Isle of Capri, Argosy Gaming, or even Jack Binion's Horseshoe Gaming, Bybee said.

"Those could get you into some different markets," Bybee said. "They have several good locations in the Midwest and South.

"You don't have to buy someone as big as you. But you may make it harder for someone to swallow you."

If Wynn and Mirage Resorts decide to go with MGM Grand, many believe they'll want MGM Grand to go higher, since Mirage Resorts' stock traded as high as $26.38 last spring.

"While we believe the Mirage Board of Directors may not accept the (MGM Grand) bid of $17 per share because they consider it too low ... the board may face pressure from shareholders to negotiate a better deal," Linde wrote. "It looks like the deal could be done at a higher price and still be favorable to (MGM Grand)."

Linde estimates MGM could immediately boost earnings by 11 percent with a cash-stock deal, and 26.6 percent with an all-cash deal. That would leave MGM Grand lots of wiggle room to boost its bid.

MGM Grand might be willing to negotiate a price above $20 per share, but not much above, said Jason Ader, senior managing director of Bear Stearns.

"They're not going to do a deal that's not accretive to earnings immediately," Ader said.

Just as important, at least in this deal, is whether Wynn would be able to play a major role in the combined company. That's definitely possible with Kerkorian, who is known for a hands-off style of management, said Bill Thompson, chair of UNLV's department of public administration.

"(Wynn) wouldn't have to work for Kerkorian, because Kerkorian doesn't operate that way," Thompson said. "In a case like that, there's the opening for Wynn. He can be in charge of the whole operation ... and Kerkorian, in a sense, could carry on his legacy through Steve Wynn.

"That would be a different relationship (than Wynn's role at Mirage Resorts), but I don't think he has to be in a subservient relationship."

For MGM Grand, the bid would be an opportunity to create a 900-pound gorilla on the Strip, with a huge share of the high-end market. The "financial might" of MGM-Mirage, as MGM Grand President Jim Murren has called it, would make it extremely difficult for competitors to catch up.

Robin Farley, gaming analyst with Deutsche Banc Alex. Brown, estimates the combined company would produce annual cash flow of $1.1 billion, plus as much as $100 million in annual cost savings, "to say nothing of asset sales and the fact that MGM could use funds that Mirage has earmarked for Atlantic City and the Bellagio expansion to pay down debt."

"Larger companies get better pricing when they borrow money, and higher price-earnings multiples on Wall Street," Bybee said. "If you've got a public company, you've got to grow. The easiest way to grow in this industry is to buy someone else."

But that factor -- that the Strip's other major players simply can't afford to let MGM Grand swallow Mirage Resorts -- may force the Strip's other major companies to enter the fray, should MGM Grand and Mirage Resorts begin dealing.

"(Competitors) have to think hard about it, especially if (Mirage Resorts) is about to disappear," Anders said. "If MGM ends up with it, those assets are gone."

Harrah's is the most widely discussed competitor for Mirage Resorts, given the company's lack of a large presence on the Strip, and its need for a high-end portfolio. Another significant factor is Wynn's friendship with Harrah's Chief Executive Phil Satre -- raising the possibility if Wynn seeks a white knight, he would approach Harrah's.

Eadington believes a deal with Harrah's might actually make more financial sense than MGM Grand.

"You expect symbiotic interactions (in mergers)," Eadington said. "In many respects, (MGM Grand and Mirage Resorts) are somewhat redundant. They are top-end companies, with a strong understanding of the high-end market. They don't complement as much as replicate each other."

Harrah's and Mirage Resorts, on the other hand, makes strong strategic sense, Linde said.

"(Harrah's) is interested in acquiring additional Las Vegas Strip capacity and has been considering an expansion at the Rio," Linde wrote. "Buying (Mirage Resorts) also gives (Harrah's) entry into the Mississippi Gulf Coast. We believe that strong strategic reasons exist for a Harrah's-Mirage Resorts combination."

Park Place is seen as less of a possibility, since it is trying to digest its $3 billion purchase of Caesars World Inc. Another factor, observers say, is the rivalry between Wynn and Park Place Chief Executive Arthur Goldberg.

Still, analysts and observers insist Park Place cannot be totally dismissed.

"Any acquisition-oriented gaming company has to come out of the woodwork," Ader said on cable network CNBC this morning. "You've got to believe Arthur Goldberg is checking this out."

Eadington agreed.

"Park Place has been the most aggressive company in acquisitions," Eadington said. "They certainly would look at it, because it's in their nature to acquire. They haven't stayed out of the game in the past. They'd be one of the players, I would expect."

There is a third option, albeit an extremely risky one.

"One scenario in these situations is taking the company private through an LBO," Farley said. "But that would require a sizable partner to contribute equity."

In an LBO, a group of investors offers to acquire all of a company's outstanding stock, removing it from the public markets. To finance such a transaction, the group takes out a massive amount of debt, using the assets of the target company as collateral.

The most attractive feature to Wynn with an LBO is that it would allow him to retain control of Mirage Resorts, and it would end any need to deal with Wall Street.

But the price would be extremely high; Wynn would need to offer at least $20 a share, analysts say. Moreover, the board would be compelled to consider all counterbids for the company.

In order to sell the bonds necessary to fund an LBO, a buyer needs to have at least $1 in equity for every $3 in debt. Wynn and Mirage insiders already control 16 percent of Mirage Resorts' stock, but in order to pull off an LBO, at least $1 billion in new cash would have to be invested in Mirage Resorts to build up the proper equity position, analysts say.

Some speculate New York financier Carl Icahn, owner of the Stratosphere and two Arizona Charlie's, could be willing to be Wynn's partner.

"Icahn is licensed, so he and Steve Wynn could form an alliance," Thompson said. "There's talk he's using the Stratosphere to get his foot in (the Las Vegas market) so he could get his license and start dealing.

"This is the kind of thing that would draw Icahn to be a major presence in this town."

Others downplay the Icahn possibility, saying it isn't in keeping with Icahn's reputation as a "bottom-fisher."

"Icahn is adding to his casino portfolio, but he's bought most out of bankruptcy," CS First Boston's Anders said. "(Mirage) is not a distressed security."

Icahn could not be reached for comment.

Even if Wynn could get a new investor to put up cash for equity, the $2.1 billion debt load of Mirage Resorts would probably double, as management borrowed cash to purchase the company's remaining shares. That would create crushing interest costs.

Linde estimates an LBO would result in debt levels at least 7.6 times the company's annual cash flow.

Trying to fund casino properties with such heavy debt levels has been tried in Las Vegas, without much success. The debt-heavy Stratosphere went bankrupt just months after opening, after cash flow failed to cover interest costs. The Venetian is also financed with a great deal of debt and has struggled in its first year, though the property is moving toward break-even status.

"We believe that this scenario (LBO) is not likely considering the high resulting debt level," Linde wrote.

Though there's literally dozens of options available to Wynn and Mirage Resorts, Thompson said it might be futile to guess what Las Vegas' most prominent casino boss might have up his sleeve.

"He'll do whatever people don't expect," Thompson said.

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