MGM Mirage outlines profit potential of merged company

By Liz Benston (contact)

Wednesday, Sept. 22, 2004 | 10:47 a.m.

MGM Mirage said a combined MGM Mirage-Mandalay Resort Group entity would have earned a profit of $1.83 per share for the six months ended June 30 compared with a profit of $1.36 per share for MGM Mirage alone -- a result that's better than one expert had predicted.

MGM Mirage is expecting to close a $7.9 billion acquisition of Mandalay by the end of the first quarter of next year.

Fulcrum Global Partners analyst Joe Greff said the estimates, revealed in a filing with the Securities and Exchange Commission, are rosy because the company will be generating more extra cash than expected, which can be used to more quickly pay down debt.

"This (earnings) accretion is meaningfully better than current (Wall Street) expectations, in our view," Greff said in a research note to investors.

In the filing, MGM Mirage said the combined entity would have earned $267.4 million for the six months ended June 30 compared with $198.8 million for MGM Mirage during the same period. The results were calculated as if the acquisition had occurred on January 1, 2003.

The combined company would have generated $3.7 billion in revenue compared with just $2.1 million for MGM Mirage. That figure includes promotional expenses. Casino revenue for the combined company would have been $1.8 billion compared with $1.1 billion for MGM Mirage. Room revenue would have been $934.8 million compared with $467.3 million for MGM Mirage.

The figures include results from Mandalay properties as well as the Monte Carlo resort, which is jointly owned by MGM Mirage and Mandalay. They also include interest expenses and taxes and the issuance of new debt to finance the transaction. The results don't include any cost savings that may result from eliminating duplicate departments or operational improvements, MGM Mirage said. It also doesn't include any possible sales of properties that could occur as a result of the merger.

MGM Mirage reiterated in the filing that it doesn't intend to sell any of its or Mandalay's casinos except for one of the properties in Detroit, where each company has a casino.

Merrill Lynch analyst David Anders on Monday upgraded MGM Mirage to "buy" from "neutral," saying he expected the company to increase earnings 15 percent per year over the next several years and that the company's share price could rise 24 percent in a year.

Besides new projects such as the upcoming second tower at Bellagio and a jointly owned casino in Macau, some of that growth will come from paying down debt after the Mandalay acquisition, Anders said in a research note.

The combined company could generate 8 cents in incremental earnings per share per year if it used $350 million in extra cash to pay down debt, he said.

Merrill Lynch bond analyst John Maxwell noted last week that the company will likely use cheaper bank debt to finance the deal rather than stock, which would be more expensive. The bank market is receptive to casino offerings and the company should be able to pay down its debt load if the Las Vegas market remains robust, Maxwell said.

The Mandalay acquisition will give MGM Mirage a wider array of properties and make it less dependent upon its high-end Bellagio, which will face new competition when the Wynn Las Vegas resort opens next year, Anders said. MGM Mirage also will be picking up more vacant land in Las Vegas just as real estate prices and residential projects are booming on the Strip, he added.

Greff also is bullish on the Strip. A recent room survey shows that rates have increased from a year ago for the past month, while convention attendance is expected to increase 15 percent per month through the rest of the year, Greff said.

The first five months of next year "will be the strongest yet" for the convention industry, he said.