MGM Grand/Mirage looking at cost savings, stock offering, asset sales

David Strow

Tuesday, March 7, 2000 | 10:34 a.m.

MGM Grand Inc. executives have praised the attractiveness of the assets their company will acquire in its $6.4 billion marriage with Mirage Resorts Inc.

But with those assets could come something far less attractive to the company or its shareholders -- more than $6 billion in new debt. That would lift MGM Grand's debt load to more than $7.5 billion.

Analysts expect MGM Grand will save as much as $150 million per year by combining operations with Mirage Resorts. Still, the company will be placing its prized investment grade rating in jeopardy unless further efforts are undertaken to raise and conserve cash, analysts say.

"(MGM Grand) announced its desire to preserve its credit rating, however, this level of debt does not usually support an investment grade rating," Lehman Bros. analyst Stuart Linde wrote in a report.

MGM Grand said it will reduce those levels through a combination of "free cash flow and the sale of non-strategic assets." MGM Grand is also expected by many to sell additional stock to help improve its balance sheet -- particularly to its majority shareholder, Los Angeles billionaire Kirk Kerkorian.

But while asset sales are being considered, MGM Grand Chairman J. Terrence Lanni also insisted the new company will be about growth, and will continue to move forward a variety of expansion projects across the country.

"We are a company that is looking for growth, not entrenchment," Lanni said. "We will look to enhance their facilities in Las Vegas, as we would enhance ours."

At the forefront of Mirage Resorts' expansion plans in Las Vegas is an announced 1,400-room expansion at the Bellagio, a project expected to cost $250 million.

Many analysts are urging MGM Grand to scrap this plan, at least for the time being, and focus its cash on debt reduction.

"It would be inconsistent to do this Bellagio project when they have a couple of things ... that require significant investment," said Steve Altman, analyst with Duff & Phelps Credit Rating Co. in Chicago. "If they want to maintain an investment-grade rating, they have to establish a credible plan for how they'll improve their balance sheet. That usually doesn't entail building massive new projects.

"The higher their borrowing costs, the higher the potential for dilution of earnings."

But Linde, while noting the combined company's heavy debt load, said the Bellagio expansion could produce investment returns as high as 25 percent a year -- making it a worthwhile use of cash.

"If I were them, I'd do it," Linde said. "I think it's a very good use of your capital. The Bellagio is always sold out."

Still, it is a project MGM Grand could delay, he said.

"If you think about it, is there any new development (on the Strip) for the next five years?" Linde said. "They could always do this at a later date."

The Bellagio expansion is just one of a series of projects planned by the two companies over the next several years.

Mirage Resorts has committed to two near-term projects, both in Atlantic City. The first is its partial ownership in the Borgata, a 1,027-room joint venture with Boyd Gaming of Las Vegas. Mirage Resorts has committed to providing $60 million in cash to the project, as well as $90 million in land.

The second, far more expensive projects for both Mirage Resorts and MGM Grand are their separate plans to develop $1 billion casinos in Atlantic City. Mirage Resorts' project was first proposed in 1995, but has been repeatedly delayed, in part by a string of legal actions by the company's archrival, Trump Hotels and Casino Resorts. Trump has fought plans by city officials to help fund a tunnel project that would provide access to the new Mirage Resorts casino.

Despite those delays, Mirage is still ahead of MGM Grand's project, which was only approved in January. MGM Grand has been accumulating land for the project since 1996, but construction is not expected to start for at least three years.

MGM Grand will probably abandon its plans to build independently in Atlantic City and go with the Mirage Resorts project, since it is further along in the development process and has a more desirable location.

"That would free up some land for sale," said Robin Farley, analyst with Deutsche Banc Alex. Brown.

Mirage also has long-term plans to develop the 55-acre Boardwalk tract just south of the Bellagio on the Strip. Though Mirage hasn't laid out those development plans yet, Farley doesn't expect MGM Grand would be as willing to part with that property.

"I would think that is a valuable piece of property that MGM wouldn't want in the hands of a competitor," Farley said.

MGM Grand is also on the hook for an expensive new project of its own -- a permanent home for its casino in Detroit. This project is expected to cost $800 million.

Before it considers which projects to move forward on, MGM Grand will identify what assets could be sold to reduce debt.

One of the most commonly mentioned sale possibilities is the collection of art at the Bellagio, valued at $400 million. Mirage Resorts Chairman Steve Wynn owns one-half of this collection, and leases it to the Bellagio for more than $5 million per year. MGM Grand is also expected to target some smaller assets, including Mirage Resorts' corporate aircraft.

Though the art is being eyed closely, it can't be assumed that MGM Grand will sell off the entire collection, CC First Boston analyst Dave Anders said.

"I don't know if you can pass judgment and say the art is superfluous," Anders said. "I actually think it's fairly unique, and does create some aura for the property. Whether you need $400 million (in art) instead of $150 million is what we need to debate."

Several casinos could also go on the block. Most mentioned as possible targets are the Golden Nugget hotel-casinos in Las Vegas and Laughlin, though some analysts believe that circle could widen to include MGM Grand's three-casino complex in Primm and its property in Australia.

Beau Rivage is less of a possibility with MGM Grand, since the company had been looking for an entry into the Biloxi, Miss., market, Anders said.

By combining asset sales with a $1 billion equity offering, MGM Grand could easily keep its investment-grade levels, Linde said.

Still, MGM Grand might not be in a hurry to depart with any of Mirage Resorts' properties, Anders said. Instead, he believes MGM Grand will focus on selling such assets as corporate aircraft, parts of the Bellagio art collection and undeveloped real estate holdings.

"They're all good properties," Anders said. "With the exception of Golden Nugget-Laughlin, I can't imagine what you'd want to sell.

"The Golden Nugget properties could be a target, but Mirage has been trying to sell them for the last three to four years, and they could never get the right price."