Tuesday, Jan. 27, 2004 | 11:05 a.m.
MGM MIRAGE of Las Vegas said today it's buying troubled British dog track company Wembley plc for about $490 million, giving MGM a big slot operation in New England and further positioning the gaming giant to capitalize on the anticipated deregulation of gambling laws in the United Kingdom.
Wembley generates most of its revenue from its Lincoln Park greyhound track in Rhode Island, which analysts say yields some of the highest revenue per slot machine per day in the nation. The track has more than 2,200 slot machines and state approval to add up to 3,000 machines. The London-based company also owns three greyhound tracks and one horse track in Colorado as well as seven greyhound tracks in the United Kingdom.
Deutsche Bank Securities casino analyst Marc Falcone said the deal is significant because it attempts to position the company -- which has already announced deals to develop casinos in Britain -- ahead of expected gambling expansion in that country.
The transaction includes 14 acres of land at Wimbledon near London as well as "some very good potential gaming locations throughout the U.K.," Falcone wrote in a research note to investors today. The transaction could add as much as 5 cents per share to the company's 2004 earnings, he said.
The deal has been approved by both companies' boards of directors and is expected to be complete by the third quarter. It is subject to approvals by the court, shareholders and regulatory agencies.
A federal grand jury in September charged Lincoln Park Chief Executive Officer Dan Bucci and Wembley plc Chief Executive Officer Nigel Potter with 22 counts of fraud including allegations that they paid a law firm tied to former Rhode Island House Speaker John Harwood to facilitate approval of additional slot machines at Lincoln Park.
The indictment also alleges the men fought legislation that would allow a Rhode Island Indian tribe to have a casino. Harrah's Entertainment Inc. has an agreement with the Narragansett tribe in Rhode Island to build a casino in West Warwick. The deal would give Harrah's an ownership stake in the casino and would involve managing the casino for the tribe. Wembley has been a primary opponent of the Narragansett casino proposal, which has failed for years to receive legislative approval and is opposed by Rhode Island's governor.
Harrah's spokesman Gary Thompson said the MGM MIRAGE deal won't change the company's plans to develop a $500 million resort for the tribe.
The company will be seeking a ballot initiative in November that will ask residents whether they want the casino.
"Our actual competition is not with the (Lincoln Park) track, it would be with the people in Massachusetts and Rhode Island who drive to Connecticut casinos that generate over $1 billion in revenue from Rhode Island and Massachusetts residents," Thompson said.
"We're confident that if it's put to a vote, the ayes will prevail."
In December, Harrah's Chief Executive Gary Loveman said the company was giving up pursuing gambling in Massachusetts and would instead focus on Rhode Island and consider buying the Lincoln Park track. Harrah's, Penn National Gaming and Kerzner International also bid on the track, Falcone said.
Some casino officials had said the Lincoln Park scandal had decreased the appeal of purchasing the track and other assets from Wembley but analysts said major companies were interested because of the profit potential of the Lincoln Park track and Colorado tracks, which don't yet have slots.
MGM MIRAGE will acquire the Lincoln Park operations "free and clear of the indictment and any liabilities," the company said. Under an agreement entered into by Wembley plc with the Department of Justice, acting through the U.S. Attorney in Rhode Island, the indictment will proceed against an entity funded by Wembley plc prior to its separation from the company. MGM MIRAGE will not acquire any interest in that entity.
MGM MIRAGE will offer Wembley shareholders about $13.65 in cash per share as well as shares in Newco, a subsidiary company set up as part of the group's Lincoln Park reorganization to limit liability of legal action, Falcone said.
The agreement marks MGM MIRAGE's second relationship with a track facing federal charges. Last year, MGM MIRAGE received a contract from the New York Racing Association to operate up to 4,500 slot machines at the Aqueduct Race Track in Queens, N.Y. Federal prosecutors in December charged two former NYRA officials and four former track clerks with conspiring in a 20-year scheme to evade taxes on $19 million in bets. NYRA avoided prosecution by paying $3 million in fines and agreeing to reforms. MGM MIRAGE has not yet resumed construction on the $100 million project in December on what could become one of the largest and most lucrative racinos in the country.
"Wembley plc's leading position in Rhode Island represents a strong fit with our existing gaming operations and will allow us to leverage our significant gaming expertise and strong balance sheet across the Wembley plc group," MGM MIRAGE Chairman and Chief Executive Terry Lanni said in a statement. "Additionally, Wembley plc owns sites in the United Kingdom which could complement our plans to develop facilities in the United Kingdom, should appropriate gaming reforms be adopted."
Goldman, Sachs & Co. bond analyst John Kempf called the purchase "curious" given reports that the potential spread of slots and casinos in the United Kingdom "is further off than expected."
"Moreover, we believe that MGM has a number of attractive development opportunities in Las Vegas and Atlantic City, but there is no sign that it is purchasing these opportunities," Kempf wrote in a research note to investors today. "This is also an indication that MGM is not focusing its effort to get back to investment-grade ratings."
MGM MIRAGE shares rose about 91 cents to $41.16 this morning. The company reports fourth-quarter earnings Wednesday.