Kerkorian sticks as cash rolls in

By Liz Benston

Thursday, June 21, 2007 | 7:17 a.m.

Here's why Kirk Kerkorian is holding off on the rare chance to acquire some of MGM Mirage's most prized assets: A new business strategy is swiftly unfolding on the Las Vegas Strip - one so bold and convincing that the billionaire dealmaker and MGM Mirage's majority shareholder wants a piece of the action.

MGM Mirage announced Wednesday a 50-50 partnership with a Bahamas casino developer to build a resort on the southwest corner of the Strip and Sahara Avenue. MGM Mirage can now accelerate its plans not just to develop underused land in Las Vegas but also in Atlantic City and beyond.

By creating joint ventures with partners rather than going it alone, the company can build resorts more quickly and with less risk.

Speeding the development process also allows MGM Mirage to capitalize on its mammoth real estate holdings when investor interest in the casino industry, and specifically, Strip assets, is peaking.

This fast-moving financial landscape has shifted in MGM Mirage's favor, yielding potential rewards that are greater than the company, including Kerkorian, would have envisioned just a few months ago.

And he, more than anyone at MGM Mirage, will benefit - as long as he stays with the mother ship and doesn't peel off any of its assets for himself or sell them to others.

So that's what he has decided to do.

Kerkorian, 90, was born into the old school of casino development. And yet, the man who helped push the Strip into the modern age by building the country's largest hotel - twice - is also forward-thinking.

One example is CityCenter, MGM Mirage's $7.4 billion project next to the Bellagio. When competitors and financial analysts questioned its size, expense and nongaming focus, Kerkorian jumped on board, enamored with the idea that a stylishly designed urban landscape of multiple condo and hotel towers could raise Las Vegas' image as a town known for more than its four-mile lineup of big casinos.

And now, Kerkorian is willing to take even bigger gambles, riding a potentially larger wave of growth over the next few years rather than cashing in his chips early.

In withdrawing its offer to purchase CityCenter and Bellagio, Kerkorian's privately held investment company, Tracinda Corp., said the deal with resort developer Kerzner International is evidence that "there is substantial unrecognized value in the assets of MGM Mirage."

"The company's approach to joint venture transactions ... demonstrates that there is significant potential to unlock value for the company's shareholders," the statement said.

Primary among them, of course, is Kerkorian, who might otherwise have traded his shares in the company for clear ownership of Bellagio and CityCenter - or the entire company.

The multibillion-dollar resort, proposed for a previously dismissed corner near the company's Circus Circus, would take a year to plan and three more years to build - overlapping the construction of CityCenter, which is expected to open in 2009 under an already speedy timetable. The new resort could open as early as 2011. The schedule for the Kerzner deal is even faster than company executives envisioned when they purchased the land at Sahara Avenue.

MGM Mirage is seeking similar partnerships to extract profit from its land holdings. That could include joint ventures to develop resorts on vacant or underused land and partnerships to redevelop or sell off parts of its existing casinos.

As an example, MGM Mirage could sell 50 percent of one of its Strip casinos to a business partner to cash in on higher valuations for casino land than are currently reflected in the company's stock.

"MGM Mirage owns land between Treasure Island and Mirage that's just shrubbery and a driveway," Deutsche Bank stock analyst Bill Lerner said. "You could build a resort there with a partner, for example. It's about doing that over and over again."

Partnerships aren't entirely new. Predecessor Mirage Resorts partnered with other companies to develop the Monte Carlo on the Strip and on land MGM Mirage would inherit to build the Borgata in Atlantic City. American casino operators were required to work with local partners to build casinos in Macau, China, while MGM Mirage has also struck agreements with partners to build hotels in China, the Middle East and other places abroad. The difference now is that MGM Mirage is more willing to split returns on its home turf, creating financially superior deals than those available years ago.

Since Kerkorian's surprise offer nearly five weeks ago, MGM Mirage has been inundated with calls from potential partners interested in creative collaborations. They included Kerzner, an experienced operator of casino resorts. Besides its flagship Paradise Island resort in the Bahamas, Kerzner developed the Mohegan Sun tribal casino in Connecticut and is building resorts in Dubai, Morocco, Mexico and other exotic locales.

Beginning with founder Sol Kerzner's call to MGM Mirage Chief Executive Terry Lanni about three weeks ago, an agreement was packaged with lightning speed. Other partners, money in hand, are waiting in the wings.

"We've just been overwhelmed" with joint venture deals, President and Chief Financial Officer Jim Murren said. "It's just been unreal. They've been stacking up like cordwood."

By embarking on partnerships, the company is following the lead of the hotel industry, where fee-based management contracts and partial ownerships are a common way hotel brands can rapidly build global empires

The strategy is attracting groups such as private equity companies with money to burn. These little-regulated entities, which seek high returns for wealthy investors, are snapping up hotel companies they think are worth more than their value in the public markets.

Based on the cash casinos generate, casino companies are cheaper, more profitable investments than hotels.

"Las Vegas gaming companies have more real estate value than any other market in the United States. And these valuations are growing higher by the day," said Dennis Farrell, a bond analyst with Wachovia Capital Markets. "They recognize that time is of the essence - they need to strike while the iron is hot. While the land grab is continuing, they can take advantage of their land today and create more value for shareholders in five years rather than over the next 15 years."

With all this newfound interest in casinos, Kerkorian's shares in MGM Mirage might be worth a lot more than he thought - if he holds onto them rather than swap them for Bellagio and CityCenter, as some thought he would.

"To use a baseball analogy, if we're on our way to a 100-game win season, do you trade your star third baseman and left fielder midseason or do you see how the season ends first?" Murren said. In the old days, casino companies would try to create new profits by expanding, one casino at a time - and tapping the revenue of each new casino to pay down debt and grow some more.

They kept their projects to themselves, unwilling to share future profits with partners unless they absolutely needed help with financing. Developing multiple Strip properties at once, the thinking went, would have been downright crazy.

In capitalizing on its dominant real estate position, MGM Mirage - with Kerkorian in the driver's seat - is breaking all the rules.

"This is uncharted territory," Murren said. "But clearly all our board members feel this growth path has great potential."