Surprise offer a shrewd move

By Liz Benston (contact)

Tuesday, May 22, 2007 | 6 a.m.

To understand why billionaire dealmaker and MGM Mirage majority shareholder Kirk Kerkorian made a surprise offer Monday for the Bellagio and CityCenter - the most expensive and luxurious jewels in MGM Mirage's impressive crown - one need only look at recent deals occurring in the gaming industry's plainer, yet more visible, sister: the hotel industry.

Last year's acquisitions by private investors of the Four Seasons and Fairmont Hotels chains, each worth about $4 billion, weren't lost on MGM Mirage bosses. Those deals valued those companies at more than twice what MGM Mirage or other casino competitors are worth, as a factor of what the companies' underlying properties earn.

Four Seasons and Fairmont, which operate luxury hotels under management contracts, have irreplaceable assets in the world's major urban centers. Why shouldn't MGM Mirage, the largest property owner along the Strip, reap similar rewards by having its stock price reflect that value?

Like most responsible owners of Strip property these days, MGM Mirage wants to unlock today's value for land that is gaining value by the month.

Problem is, investors traditionally have viewed casinos as more risky than hotels, resulting in lower values for the company's assets and lower share prices than hotel companies with similar properties. Regulatory barriers make casino properties and stock harder to buy and sell than hotels , and make the job of running the business - under Nevada's vigilant Gaming Control Board - a more cumbersome, even volatile, process, investors say.

Casino bosses say such a risk assessment of their industry is unfair, because regulatory burdens have eased over the years and their businesses are just as, if not more, profitable than hotel companies with more expensive stocks.

That's why Harrah's Entertainment and Station Casinos have decided to go private - exiting public markets that didn't reward shareholders with the land value executives believed their shares deserved.

News of Kerkorian's offer inflated MGM Mirage shares by at least 16 percent, or more than $10 per share, while giving a boost to other gaming companies with undervalued Strip assets.

With Kerkorian's 56 percent stake in the company, the decision to go private is essentially up to him. By focusing on the most valuable of MGM Mirage's assets, the venerable Bellagio and the $7.4 billion resort marvel CityCenter, Kerkorian can potentially reap the greatest rewards by watching those assets increase dramatically in value. For MGM Mirage, parting with those properties would allow it to be revalued based on recognition of what those properties - to a hotel investor willing to pay more - would be worth.

As it turns out, MGM Mirage stockholders don't have to sell to private investors to realize the full value of their company's casinos.

Kerkorian's shares are worth about $10 billion - enough to buy the properties without much help. Rapidly growing MGM Mirage could use the proceeds for any number of big projects on the horizon, including a CityCenter-type project next to its Circus Circus hotel.

Much like the Fairmont acquisition that has so preoccupied MGM Mirage bosses, Kerkorian could buy Bellagio and CityCenter and allow MGM Mirage to manage them. That way, the company keeps the properties in the family, so to speak - retaining control over those brands and cultivating the brand equity that's critical in the resort business. Kerkorian can pay top dollar knowing that the value of Strip property will continue to escalate.

While their peers go private, MGM Mirage executives have said they see value in being public. As a public company, it can raise capital more easily and stay visible as it aims to build a global hotel empire beyond Las Vegas. By signing a management contract with Kerkorian, MGM Mirage can arguably maintain more control over how the casinos are run than can gaming companies selling out to private owners.

Although Kerkorian has been known for his headline-grabbing, hostile-takeover attempts, his relationship with MGM Mirage is a friendly, mutually beneficial one. Kerkorian, who turns 90 next month, has taken an active interest in MGM Mirage's expansion over the years while leaving management to executives. Now, he sees how he can help MGM Mirage - by helping himself.