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October 30, 2014

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MGM MIRAGE cites ‘juggernaut’

If MGM MIRAGE consummates the biggest casino deal in history by acquiring Mandalay Resort Group, regulators aren't likely to require the company to sell off any of the combined entity's 29 casinos with the possible exception of a property in Detroit, where both companies each operate a casino, a top negotiator for MGM MIRAGE said Monday.

That's because Nevada's casino industry must consolidate or suffer from increasingly stiff competition from newer gaming states such as California and Arizona, MGM MIRAGE President and Chief Financial Officer Jim Murren said.

"Nevada is not an island in the middle of the Pacific," Murren said Monday. "It is competing ever intensively with California and other states with gaming and it's increasingly apparent to us that not only are we in direct competition with these casinos for customers but we're also losing employees to California, Arizona and elsewhere."

"We think it's a very clear business proposition that if you're not moving you're falling behind," Murren said. "If we don't do that we will lose ground competitively, not just in this market but in other areas."

Los Angeles-based attorney David Leonard, a former antitrust lawyer with the Justice Department who now represents companies in government merger investigations, thinks Murren is right.

"I think the regulators are going to leave them alone," Leonard said.

The government will have a tough time trying to prove that the Las Vegas Strip is a distinct market, he said.

Another complicating factor is how to define market control by breaking down gambling, entertainment, hotel rooms, restaurants and other amenities, he said.

"This issue is really a can of worms. There are so many different ways you can slice and dice it. It will be difficult to define their percentage of the market and I can guarantee you that (MGM MIRAGE and Mandalay) would come up with six different ways of doing it and argue for the way in which they come up with the lowest percentage" of market control, he said.

Some analysts have speculated that the combined company might sell off some properties, even if regulators didn't force a sale, in order to raise capital or focus on higher-end gambling. But other experts agree with MGM MIRAGE and say sales on the Las Vegas Strip might not be necessary.

In a research report Monday, UBS Warburg gaming analyst Robin Farley said the combined entity's 50 percent market share on the Las Vegas Strip could fall to less than 45 percent by 2006 as new casinos and expansions open.

The entity's 64 percent share of upper-end rooms on the Strip could fall to less than 50 percent by that time as other operators expand into the more profitable high-end and convention markets, Farley said.

MGM MIRAGE officials don't view any of their casinos or any of the casinos they could acquire from Mandalay as "non-core assets," Murren said. Rather, the combination of those assets will help the company more effectively compete against other markets and will help maintain Las Vegas' preeminence as a gambling mecca, he said.

California in particular has changed the competitive landscape of Las Vegas, he said.

"The California phenomenon is really a juggernaut that we're only beginning to understand," he said.

The offer for Mandalay isn't simply a reaction to more casinos in California, however, he said.

"The genesis of the (offer) is a very clear view of what we believe the future of Las Vegas is going to be," Murren said. "The gaming market (worldwide) is large and growing rapidly and our place within this gaming market is to compete on a global and certainly national stage."

A deal with Mandalay would provide the company with capital to expand and improve on the company's existing assets in Las Vegas, which compete with other vacation destinations, he said.

Antitrust experts still say the merger would be looked at closely and would in part hinge on information explaining whether Las Vegas is a unique experience relative to other destinations.

The combined company could argue that Las Vegas competes with other large hotel cities for convention customers or business travelers, said Mike Cowie, who left the FTC as senior litigation counsel in February to enter private practice and has represented companies including American Airlines and Lockheed Martin.

But the entity will probably have a more difficult time persuading antitrust authorities that other cities are substitutes for leisure travel, Cowie said.

It's more difficult to argue that riverboat gambling in Mississippi is a "close substitute" to Las Vegas, he said.

Regulators would examine the complete experience offered in Las Vegas, not just gambling and whether it's available in other states, he said. Based on other cases involving destination resorts, authorities could conceivably argue that an MGM MIRAGE-Mandalay combination could exert too much control on the Strip.

When Carnival Corp. outbid Royal Caribbean Cruises Ltd. for control of P & O Princess Cruises Plc, regulators found that a sufficient number of customers viewed a cruise as a unique experience and a separate market from, say, a trip to Europe, Cowie said.

In a case involving the combination of ski resorts in Colorado, authorities found that skiing at high-end resorts is enough of a unique experience to justify looking at it as a distinct market, he said.

"I think the focus will be on whether this will lead to higher prices for destination travelers" at the high end, Cowie said. "There's more competition at the lower end."

Warren Grimes, a professor of antitrust law at Southwestern University Law School in Georgetown, Texas and a former Federal Trade Commission attorney, said companies tend to try to define their competition more broadly when they announce major deals.

"By merging, they become a meaner and more efficient competitor in a broader (competitive) market," he said. "Sometimes that's true and sometimes it's not. The real question is whether (MGM MIRAGE) can back it up."

FTC officials are likely to ask competitors how they view the potential merger as well as compile comments and complaints from consumers, Grimes said.

In the Princess Cruises deal, companies provided regulators with statistical data on how people choose one cruise line over another, he said.

"You'd be surprised at the sophstication (and volume) of information provided in a big case like this," he said. "It's about 90 percent legal and about 10 percent public relations."

Another factor to consider is whether regulators would give a gambling deal the same scrutiny as another deal involving the sale of consumer product staples that aren't considered entertainment, he said.

"The law doesn't distinguish between industries. But it's hard to know whether, in a close case where the law could go either way, whether (regulators) are going to spend limited resources fighting a merger ... involving a luxury like gambling."

Regulators would be less likely to fight a merger in which the product at issue is hard to define, Leonard added.

"This one is so complex I suspect that the regulators are not going to be real interested in it," he said. On the other hand, the case may have "sex appeal" for regulators who can get a lot of publicity in high-profile cases, he said.

State and federal regulators have so far declined comment on the likelihood of asset sales.

Murren said the company has kept regulators informed of the negotiations with Mandalay but that the discussion hasn't touched on policy issues.

MGM MIRAGE has already received "several unsolicited calls" from entities interested in purchasing potential assets as a result of the merger, he said, declining to name the entities. The company isn't responding to those calls while it considers the deal, he said.

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