MGM thinks big after merger

David Strow

Wednesday, May 31, 2000 | 11:23 a.m.

Fresh off their $6.4 billion acquisition of Mirage Resorts Inc., MGM Grand Inc.'s top officials are already targeting their next expansion opportunity on the Strip -- the 55-acre Boardwalk just south of the Bellagio that was acquired by Mirage in 1998.

Though they're not decided on what the design will be, the company's chairman said MGM Grand is examining a megaresort geared toward "Generation X" a market largely untapped on the Strip.

The property, said MGM Grand Chairman J. Terrence Lanni, will be home to the first in "the next generation of hotel-resorts" -- and predicted its impact on the Strip would be similar to the effect the Mirage had in redefining the Strip in 1989.

"It's time to take this to another level of entertainment," Lanni said. "We want this new concept to be as the Mansions (at MGM Grand) have been to the high-end, with no peer.

"We've built wonderful city-themed hotels here ... the New York-New York set the stage for that, followed by the Paris and the Venetian. That's a wonderful idea, but it's past its prime. We need to move to another concept ... we've 'over-citied' the place."

Gaming analyst Joe Coccimiglio of Prudential Securities said the impact of such a project could spill over to other MGM Grand properties.

"The Las Vegas market has clearly proven if you put in an exciting property that creates interest among the traveling public, it creates more demand than it absorbs," Coccimiglio said. "You've got to create a property people read about and want to come see. If it's successful, it will lift results at the neighboring properties ... the Bellagio and Monte Carlo.

"That's the most important development site on the Strip, next to the property that makes the most money on the Strip. It's key that gets developed to the best use."

Lanni said MGM Grand could proceed with the project by the end of 2001.

"I would hope to have the design defined well before those 18 months are up," Lanni said. "If we're successful in paying down our debt, that will be the catalyst for moving forward on the project. If we are successful (in reducing debt) over the next 18 months, at that time we would proceed."

Lanni said MGM Grand has yet to come up with the concept for the project, starting from "a blank piece of paper."

But the target will probably be visitors between 30 and 45 years old, Lanni said.

"We're going to reach out to Generation X," Lanni said. "That's going to be an affluent group. They tend to take vacations far more frequently, balance their professional and personal lives, and have created a substantial amount of wealth.

"It's a segment that doesn't get a lot of attention here in Las Vegas. That's why we can take a niche of the marketplace and capture it for our company."

Though MGM Grand must reduce its debt load before it can proceed with such a project, company officials made it clear Tuesday that no casinos will be sold for debt reduction purposes.

"We're not going to mortgage our future to reduce debt," said MGM Grand President and Chief Financial Officer Jim Murren said. "No operating assets are on our sale list. No casinos of any kind will be on our list to sell.

"We are fully committed to the assets and the people of Mirage."

The reason MGM Grand won't sell off casinos, Lanni said, is that the company believes its portfolio gives it leadership position across the market. While properties like the Mirage and the Bellagio will solidify MGM Grand's position in the high-end gaming market, Lanni noted that the Golden Nugget in downtown Las Vegas produces half of the area's gaming cash flow, while the Golden Nugget in Laughlin is the region's top-performing property.

Still, MGM Grand believes it will be able to raise in excess of $250 million from the sale of a variety of assets that produce little or no cash flow, such as Bellagio's artwork, land parcels, apartments and corporate aircraft.

Because of the quality of the Mirage portfolio, Murren estimates MGM Grand's capital maintenance costs over the next two years will average just $150 million per year.

"We looked at every other companies we could acquire," Lanni said. "We didn't want to be burdened with buildings that are 25 years old.

"We have no interest in changing the culture of each company. You're not going to see any signs saying 'an MGM Grand resort.' We want this to be seamless to the consumer."

That transition has become official -- Lanni said the merger would be formally complete sometime this morning.

First to check off on the merger Tuesday were shareholders of Mirage. About 61.5 percent of Mirage shares were voted in favor of the merger, while 8.6 percent voted against MGM Grand's offer. The remaining 29.8 percent either abstained or were not voted.

Less than three hours after the vote, the Nevada Gaming Control Board voted 3-0 to approve the largest takeover in gaming industry history. Just after 1:30 p.m., the Nevada Gaming Commission gave the merger its unanimous consent, removing the final barrier to closing the deal.

Both control board Chairman Steve DuCharme and commission Chairman Brian Sandoval voiced some concerns over the concentration of gaming assets in fewer hands.

"Should the commission be concerned that we're placing too many eggs in one basket?" Sandoval asked Lanni.

Lanni responded that consolidation was necessary to strengthen the industry's largest companies -- and that competition remains as strong as ever, with independent casinos such as the Venetian and the Aladdin coming online.

"Someone has to play that role, and we're very happy to have that role, as opposed to someone else in Nevada," Lanni said. "I wouldn't be concerned (about a lack of competition), because there's plenty of competition at the low, middle and high (ends of the gaming market)."

In the end, the argument was enough to win over regulators.

"This will be one gaming licensee greater than the sum of its parts, and I wholly support this application," DuCharme said.

Shareholders should begin receiving cash for their Mirage shares today, said Alan Feldman, spokesman for the combined company.

Shares of Mirage Resorts will continue trading on the New York Stock Exchange until they are purchased by MGM Grand and retired, Lanni said.

Once complete, MGM Grand will become the state's largest employer, with more than 47,000 employees. It will produce 33 percent of the Strip's total gaming win, and 20 percent of Nevada's win, Sandoval said.

The significance of creating the Strip's most powerful player was not lost on Sandoval.

"When they write the modern history of Nevada, this will be a landmark day," Sandoval said. "I think this is not only good for the gaming industry, but for the entire state of Nevada."

Even MGM Grand controlling shareholder Kirk Kerkorian, arguably the Strip's most legendary dealmaker, seemed a bit taken with the magnitude of the deal.

"It's a shocker, really," Kerkorian said. "It not only closed faster than I thought, it's a really exciting acquisition.

"(Mirage) is a great company, I've got to tell you."

With the deal comes the exit of another Strip legend -- Steve Wynn, chairman and chief executive of Mirage, whose career at the company is expected to end today. Wynn said Tuesday he expects to take over the Desert Inn on June 22 -- the day the gaming commission will hold hearings on his $270 million deal to acquire the resort from Starwood Hotels & Resorts Worldwide Inc.

"Elvis has left the building ... and (today), I'm leaving the building," Wynn said.

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