Bellagio expansion on hold

David Strow

Monday, March 13, 2000 | 11:22 a.m.

Mirage Resorts Inc. disclosed today that the $250 million expansion of the Bellagio hotel-casino is on hold because of the company's merger with MGM Grand Inc.

Mirage Resorts' annual report, filed today with the Securities and Exchange Commission, states that the company's merger agreement with MGM Grand "restricts (Mirage Resorts') ability to buy and sell assets and invest in capital projects prior to our merger."

Specifically, the company said, plans to add 1,300 rooms to the Bellagio have been shelved at least until completion of the $6.4 billion merger with MGM Grand. Completion is expected by the fourth quarter.

This decision did not surprise many on Wall Street, who expect MGM Grand to focus heavily on debt reduction after completing the merger, rather than new construction.

"MGM is going to focus on getting the maximum amount of free cash flow out of existing assets ... over 12 months, rather than going into immediate expansion mode," said Joe Coccimiglio, gaming analyst with Prudential Securities. "That makes sense for them, given the level of post-acquisition debt."

Mirage's expansion announcement set off a wave of similar announcements along the Strip. The potential flood of new room supply made many analysts nervous, but Coccimiglio expressed optimism expansion talk could slow with the Bellagio expansion off the board.

"The Bellagio ... was going to be built with another theater, so that was more encouraging," Coccimiglio said. "It was somewhat questionable what the entertainment value of the other projects would be, other than more rooms. Those are the announcements that scare me."

Mirage Resorts did not make it clear whether the project would proceed after the merger was complete. MGM Grand officials could not be reached for comment this morning.

"I would suspect it will remain on hold," said Stuart Linde, gaming analyst with Lehman Bros. "They'll evaluate all their options, particularly when they make their capital structure plans public."

Separately, the Mirage Resorts report unveiled, for the first time, details of the "golden parachute" awarded to Mirage Resorts Chairman and Chief Executive Steve Wynn.

The document states Wynn will have a three-year employment agreement with MGM Grand upon completion of the merger, though either side will have the right to terminate this at any point.

If either Wynn or MGM Grand decides to terminate Wynn's employment agreement, Wynn will be entitled to a lump-sum of three times his annual salary and bonus -- a total of $11.25 million. This payment will be adjusted upward to cover any tax payments.

In addition, Wynn will have the right to purchase the company's Gulfstream III jet and New York City apartment within 10 days of the merger's completion "at fair market value." And within five years, Wynn can require MGM Grand to purchase his home at Shadow Creek "at cost."

Wynn will gross an estimated $500 million before taxes from the sale of his stock in the merger with MGM Grand.