Brokerage sees Vegas company expanding in U.K.

By Liz Benston

Tuesday, March 30, 2004 | 11:17 a.m.

MGM MIRAGE officials are expected to announce three to four more deals this year to build casinos in the United Kingdom, where the government is expected to loosen its gambling laws to permit many more casinos and an explosion of slot machines in the next couple of years, investment firm Bear, Stearns & Co. says.

MGM MIRAGE already has four partnerships with British companies to develop casinos contingent upon deregulation in the United Kingdom -- more than any other U.S. competitor interested in that market. Also, the company in January agreed to buy British dog track owner Wembley Plc for about $491 million. Wembley faces a counteroffer from a group that includes Caribbean resort developer Kerzner International Ltd.

MGM MIRAGE spokesman Alan Feldman today declined to speculate on the Bear Stearns figures and could not confirm whether any U.K. deals were imminent.

"Our interest in the U.K. is well established and we continue to seek out opportunities there," Feldman said. "We're in conversations with lots of folks about lots of projects."

In the report, released Monday, Bear Stearns analysts said MGM MIRAGE's current and future U.K. investments could yield more than $1 per share in incremental earnings per year, or about half of the $2.11 in earnings per share expected by Wall Street analysts in 2005.

MGM MIRAGE envisions building casinos of around 80,000 square feet, among the largest in Britain. The market can bear about 10 casinos that are more than 60,000 square feet, the report said. The report estimates that new regulations also will create about 36 casinos between 10,000 square feet and 60,000 square feet and about 40 that are between 5,000 and 10,000 square feet. The rest would be below 5,000 square feet -- the minimum size considered under new casino rules.

Company officials have said they have an edge over U.S. competitors in locking up prominent sites for casinos that are few and far between in Britain.

"We concur with this in some respects," the report said. "Put simply, there is less space in the U.K. to build large facilities. The company has secured already (and plans to secure more) several prime locations" including a casino and entertainment complex proposed in the heart of London, it said.

Harrah's Entertainment Inc. could earn up to 50 cents per share per year from its U.K. investments, Bear Stearns analysts said. By comparison, the company is expected to earn $3.32 per share in 2005. Bear Stearns has a "peer perform" rating on MGM MIRAGE and an "outperform" rating on Harrah's, which is proposing smaller and less risky projects than MGM MIRAGE.

Harrah's is expected to spend about 2 billion British pounds (about $1.8 billion) to build seven or eight casinos of 40,000 square feet to 50,000 square feet in partnership with British bingo hall operator Gala Group Plc, the report said. The company also has plans to develop at least one wholly-owned destination resort, it said.

The estimates are among the first that have been published on U.S. investments in the United Kingdom. Estimates for other companies, including Las Vegas Sands Inc. of Las Vegas and Isle of Capri Casinos Inc. of Biloxi, Miss., aren't available. Both Las Vegas Sands, which owns the Venetian hotel-casino on the Strip, and riverboat operator Isle of Capri have proposed partnerships to develop major casinos in Britain.

Bear Stearns analysts said that slot giants International Game Technology of Reno and Alliance Gaming Corp. of Las Vegas would gain incremental earnings per year of about 27 cents per share and 26 cents per share, respectively, should both companies obtain a share in the United Kingdom similar to their share of the slot machine market in the United States. Analysts expect IGT to earn about $1.49 per share in 2005 and expect Alliance to earn $1.42 per share that year.

Under deregulation, the British market may expand to about 185 casinos from 129 casinos and to more than 42,000 machines from about 900 machines, the Bear Stearns report said. Gaming revenue is expected to grow to 2.4 billion pounds ($4.4 billion) from 723 million pounds ($1.3 billion), it said.

Those growth estimates are conservative compared to other international markets such as France, where gradual gambling deregulation led to an increase in gaming revenue to 2 billion Euros ($2.4 billion) from 450 million Euros ($547 million) in seven years, the report said.

Other analysts have offered other estimates for casino growth in the United Kingdom. Late last year, Goldman, Sachs & Co. said Britain could add up to 100 casinos and up to 100,000 slot machines over the next four years.

U.S. companies and Bahamas-based Kerzner International have committed more than $700 million in capital to develop casinos in Britain, Goldman Sachs analysts said.

The British government published a first draft of its gambling legislation in November and a joint committee of Parliament is expected to produce a follow-up report next month that will be open to further amendments. Bear Stearns and some other analysts say they expect the legislation to be implemented by 2006 or early 2007 -- more conservative than the 2005-2006 timeframe that some analysts had initially predicted.

"It is likely that international growth will take longer than even our most conservative forecasts because social resistance to gaming expansion is generally high and settling up the regulatory environment and legal restrictions is arduous and time consuming," Goldman Sachs analyst Steven Kent wrote last year. U.S. companies are increasingly seeking growth opportunities abroad because of increasing competition and the prospect of higher state taxes at home, he said.