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October 22, 2014

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Combined MGM MIRAGE, Mandalay vow to grow

The boards of MGM MIRAGE and Mandalay Resort Group on Tuesday voted to approve MGM MIRAGE's proposed $7.9 billion offer for competitor Mandalay, a deal that -- if finalized -- will create a gaming titan with the means to develop multiple resorts along the Las Vegas Strip as well as expand existing casinos.

Expansion opportunities in Las Vegas were key motivators for the merger, MGM MIRAGE officials said today.

"At the end of the day we are developers and (Mandalay) has a lot of land in which to further build and operate (casinos)," MGM MIRAGE President and Chief Financial Officer Jim Murren said.

Mandalay anticipated building a resort on 22 acres it owns south of its Mandalay Bay resort and also owns another 15 acres across the street from its Luxor casino, officials said. Both companies own the Monte Carlo casino as part of a joint venture as well as land nearby. And MGM MIRAGE has designs on redeveloping its aging Boardwalk casino, which sits on 55 acres between its Monte Carlo and Bellagio properties.

Mandalay will bring new ways of thinking to the combined company as it grows.

"In this industry you compete on creativity and innovation. It's not just capital and buildings," Mandalay Resort Group President and Chief Financial Officer Glenn Schaeffer said.

The companies agreed to a cash offer by MGM MIRAGE of $71 per share for Mandalay. The offer includes $4.8 billion to purchase Mandalay stock, $600 million in outstanding convertible Mandalay bonds and $2.5 billion in outstanding Mandalay debt. Terms include a cancellation fee of around $160 million that would be paid to MGM MIRAGE should another company emerge with a higher bid before the deal closes, Murren said. That's about $25 million higher than the breakup fee involved in the MGM Grand Inc. merger with Mirage Resorts Inc. in 2000.

The deal, expected to close by the end of the first quarter of next year, is subject to approval by Mandalay shareholders as well as regulatory approvals.

The combination will create the largest casino company in the world, with 28 casinos in five states and more than 70,000 employees worldwide. Revenue for the combined entity in 2003 would have been $6.5 billion, dwarfing the companies' largest competitors, Caesars Entertainment Inc. and Harrah's Entertainment Inc., by a couple of billion dollars. Analysts estimate cash flow -- a key profit indicator for casinos -- will jump from MGM MIRAGE's roughly $1.2 billion a year to about $2 billion.

That means more available cash flow to reinvest in Las Vegas, Murren said.

"Both companies have shown that they are leaders in reinvesting in this community," he said. "There's a tremendous amount of land to develop and when you develop you add jobs. We are going to become a larger employer and add more gaming and non-gaming amenities."

MGM MIRAGE officials said today they haven't yet locked in employment contracts with key Mandalay managers but intend to keep them. Few managers left when MGM Grand bought Mirage Resorts, they said. While several high-end marketing offices were eliminated as part of that merger, MGM MIRAGE and Mandalay have fewer overlapping departments on the high end, they said.

Some managers may leave of their own accord, MGM MIRAGE Chairman and Chief Executive Officer Terry Lanni said.

"You can't force people to work for you. They choose to work for you," he said.

The company doesn't expect any significant cuts in the rank-and-file labor force, Murren added.

"The gaming business has become even more labor intensive," he said. "As it evolves into this multi-faceted entertainment franchise, it's a very hands-on, people-oriented business."

MGM MIRAGE will installing its own executive team to run the Mandalay properties but Mandalay executives will remain on hand to guide the company while the transaction is in process.

Analysts say Mandalay's low-profile Chief Executive Officer Mike Ensign could either exit the business or remain active in casinos by becoming a consultant or even buying and operating a small gaming enterprise.

Schaeffer's future is more of a question mark, analysts say.

"I can't speak for him but knowing what I know about him ... I think he's going to pursue those passions of art and literature," said Murren, a friend and colleague of Schaeffer's for more than 16 years. "He's got so many interests that are so far beyond gaming. His philanthropic activities are a model which I think should be emulated and more well understood."

Schaeffer, a graduate of the University of Iowa Writers' Workshop, is a lover of art and books and has contributed to several writers programs. He helped found the International Institute of Modern Letters in Las Vegas and New Zealand, where he has a home, and established that country's largest literary prize.

Mandalay's top executives would be richly rewarded if the deal closes.

In April, Mandalay's board issued 405,000 shares of restricted stock to Ensign, 300,000 shares to Vice Chairman William Richardson and 121,500 shares to Schaeffer. Restricted shares can't be immediately sold but would be exercisable if the company is sold, analysts say.

All three officers also have millions of dollars at stake in remaining stock options that aren't exercisable unless the company is sold, analysts say. Those options were worth $8.9 million each for Ensign and Richardson at the end of the company's fiscal year in 2004, while Schaeffer's options were worth about $4 million.

The value of those options and restricted shares have soared over the past couple weeks of merger talks.

MGM MIRAGE shares have risen about 8 percent since the company went public with its first offer for Mandalay Friday, June 4. Mandalay shares have jumped about 19 percent since then.

Early today, MGM MIRAGE stock fell 1 percent to $49.05 per share and Mandalay rose 0.3 percent to $68.07 per share.

Murren said today he had discussed merger options with Schaeffer as early as a month ago, though the company had been eyeing acquisitions as early as two years ago and began having more detailed discussions internally early this year.

Merger discussions "bubbled to the surface as a hypothetical -- trial balloons are floated all the time," he said.

Mandalay was receptive to talks from the outset, though the company wasn't "looking to be sold," Murren said. "They had their own independent growth plans, which we found very compelling," he said.

Mandalay on Friday had rejected an initial offer of $68 per share based on a clause allowing MGM MIRAGE to exit the deal after 15 months should regulators block the transaction or require asset sales. MGM MIRAGE responded Monday by dropping the terms and sweetening its offer to $71 per share.

MGM MIRAGE's board voted on the offer in the early afternoon Tuesday and Mandalay's board, after breaking for dinner, reached a vote later that evening.

MGM MIRAGE officials today reiterated their position that they don't expect regulators to force the combined company to sell any casinos outside of Detroit, where the law now forbids any single company from owning multiple properties. The combined entity would own at least half of the rooms and casinos on the Strip, with an impressive bulwark of adjacent properties lining the west side of Las Vegas Boulevard and MGM Grand -- the city's largest hotel-casino -- on the east side.

"Our antitrust attorneys and advisors made the (MGM MIRAGE) board comfortable that regulatory requirements will not pose a challenge," Murren said. Selling the Detroit casino won't be a problem because several companies have already expressed interest in acquiring a Detroit property, he said.

Murren told Bloomberg News that the combined company intends to sell Mandalay's stake in the MotorCity casino in Detroit, where MGM MIRAGE also owns a casino.

Analysts still aren't ruling out the possibility of casino sales.

"While we believe there are strong arguments for the regulators and the FTC, there is no certainty of the outcome of this process," Deutsche Bank Securities gaming analyst Marc Falcone wrote in a research note today.

The diversity of those properties, from the lower end to the high end, will strengthen the company against increasing competition from tribal casinos in California and other leisure markets worldwide, MGM MIRAGE executives said. The company also will immediately benefit from owning the 1.8 million square-foot Mandalay Bay Convention Center, which is stealing business from convention markets such as Chicago and New York, they said.

"No one has all the answers. We learned a lot when we put the management of MGM and Mirage together and (their casinos) are better experiences today than they were five years ago," Murren said. "We're going to learn an awful lot about how they run their hotel business, convention business and retail business and businesses we're not strong in, like the value-oriented customer market."

The deal is "excellent timing" for Mandalay, which is on the cusp of an upswing and recently reported its best quarter ever, Schaeffer said.

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