MGM Grand Makes $3.3 Billion Bid for Mirage

Updated from 10:06 a.m. EST

MGM Grand (MGG), the hotel and casino company controlled by billionaire Kirk Kerkorian, offered Wednesday to buy Mirage Resorts (MIR) in a cash and stock deal valued at about $3.3 billion.

In a letter to Stephen A. Wynn, chairman and chief executive of Mirage, MGM Grand said it would pay $17 a share -- either all in cash or a combination of $7 a share in cash and $10 worth of MGM Grand stock -- to acquire Mirage. The bid represents a 56% premium over Mirage's closing stock price of 10 7/8 Tuesday.

The letter sought to reassure Wynn: "It is our intention that this powerful combination be accomplished on a friendly basis." But the cordial unsolicited proposal will be hard to sell to the independent-minded Wynn, analysts said.

Mirage issued a one-sentence statement: "The unsolicited proposal by MGM Grand will be considered by the board of directors of Mirage Resorts at a meeting to be held in the near future."

Mirage's stock surged 3 9/16, or 33%, to 14 7/16 in early trading Wednesday. MGM Grand's shares slipped 1/4, or 1%, to 40 1/8. Mirage's stock opened the day trading at less than half its 52-week high of 26 3/8, reached in May, while MGM Grand trades below a 52-week high of 54 9/16. (MGM Grand finished Wednesday up 1 7/16, or 4%, at 41 13/16, Mirage Resorts closed up 3 5/8, or 33%, at 14 1/2.)

The $3.3 billion equity value is based on the more than 193 million shares that Mirage has outstanding. The company carries around $2.3 billion in debt, analysts said, bringing the total price of the deal to about $5.6 billion, or 7.5-8.5 times Mirage's cash flow of around $750 million. Analysts said the price seems fair.

MGM hired both Merrill Lynch and Salomon Smith Barney for advice on the deal, analysts for the investment banks said.

Kerkorian owns around 60% of MGM Grand shares, and Wynn controls 11.3% of Mirage shares, not counting more than 200,000 shares owned by his wife, according to filings with the Securities and Exchange Commission. While MGM could appeal directly to other shareholders, analysts said friendly relations between the two men make such a move unlikely.

J. Terrence Lanni, MGM Grand's chairman, said in the letter that a deal would enable the combined company to cut costs and increase revenue.

Both companies have sales offices around the country and corporate headquarters in Las Vegas. Both also have marketing operations in the Far East, where they recruit the kind of high-roller clientele partial to resorts like the MGM Grand Hotel and Casino and Mirage's Bellagio hotel and casino in Las Vegas.

Lanni also said a deal would create "the undisputed leader in our industry by any measure." Luckily for MGM, that statement was more cheerleading than mathematics, analysts said.

"Even combined, they're not going to be as big as Park Place Entertainment (PPE)," said Dennis Forst, analyst for McDonald Investments. That fact will likely dispel regulatory concerns, he said, adding that the combination seems "an excellent fit." Forst rates MGM shares a buy and Mirage shares neutral. His firm has done no underwriting for either company.

Both companies also have plans to build casinos in Atlantic City, N.J., though neither has made much progress. MGM owns a 34-acre tract on the boardwalk, while Mirage owns a 110-acre tract in the Marina area. A tunnel road is under construction to the Marina area. Analysts said a combined company could potentially sell the smaller tract.

The offer follows increasing consolidation in the industry, most recently among smaller companies. In 1990 and 1991, an economic recession fostered pro-gambling measures in many states, including laws allowing riverboat casinos to flourish. Since then, states have been loath to court casino owners, prompting gaming companies to merge in search of revenue growth.

The hotel chain ITT, now owned by Starwood Hotels and Resorts Worldwide (HOT), bought the Caesar's resorts in 1995 and later sold them to Park Place. British.-based Hilton Group bought the Bally's resorts in 1996.

Joe Coccimiglio, analyst for Prudential Securities, said he expects the industry to narrow to three major players within a few years.

"There's definitely a case to be made for size, especially on Wall Street, where large-cap stocks have done better than small-cap stocks," Coccimiglio said. Coccimiglio rates MGM shares outperform and Mirage shares strong buy. His firm has not done underwriting for either company.

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