Mirage Resorts Deal Confronts Wynn-Win Scenario

Inside the Bellagio hotel, his monument to opulence and excess on the Strip, the most important man in Las Vegas has a decision to make alone.

Stephen A. Wynn, 57, has built a casino and resort empire, redefined the desert gambling Mecca, and won respect and made enemies among his peers.

"In terms of importance, he doesn't have a rival," said Daniel Davila, analyst for Southcoast Capital. "More so than Ben Siegal, more so than Howard Hughes. He spent more on a golf course than most had spent on property."

But now, Wynn has in his hands an offer, for the moment friendly, from MGM Grand(MGG) to buy his Mirage Resorts(MIR) at a significant premium.

Wynn owns just 11.3% of the company's stock, and the $3.28 billion offer could be the beginning of a battle pitting him against another casino and entertainment giant, Kirk Kerkorian, the Beverly Hills billionaire who owns a 62.3% stake in MGM Grand.

But although he does not hold a majority stake in Mirage, Wynn is firmly in command, and analysts say the fate of the MGM Grand offer rests with him.

"The issue boils down to one issue and one issue only: What does Steve Wynn want to do?" said Harry Curtis, analyst for Robertson Stephens. "Is he fed up with Wall Street? Does he feel like he'll have a much more pleasant life without Wall Street?"

Battle on the Strip: How Do the Sides Stack Up?

MGM Owner Kirk Kerkorian Mirage CEO Steve Wynn Market capitalization $2.38 billion $2.78 billion Annual revenues $773 million $1.52 billion Projected Fiscal 2000 cash flow* About $500 million About $630 million Long-term debt $715 million $2.38 billion

Sources: Securities and Exchange Commission filings, * interviews with analysts

Wynn has built a resort chain with a market capitalization of a $2.8 billion, but Wall Street has lately been displeased with him. Profits fell 10% for the third quarter as the $1.6 billion Bellagio cut sharply into the Mirage's income. The company missed earnings expectations by 4 cents a share for the third quarter shortly after the chief financial officer, Daniel Lee, departed, denying rumors of a feud with Wynn. By Tuesday, Mirage's stock closed at 10 7/8, just a fraction off its 52-week low and nearly 60% below its 52-week high of 26 3/8.

But on Wednesday, Kerkorian sent Mirage's stock soaring as his MGM Grand offered to buy Mirage Resorts for $17 a share, either all in cash or a combination of $7 cash and $10 worth of stock. Mirage's shares gained 3 5/8, or 33.3%, to end trading at 14 1/2.

James J. Murren, chief financial officer for MGM Grand, said the timing seems right for a deal.

"We have the best balance sheet in this industry, an industry where not everybody is as profitable as they want to be," Murren said in an interview.

Combining the two companies would create obvious savings, analysts said, including in the marketing and headquarters operations and in both companies' plans to build new resorts in Atlantic City, N.J.

Of the industry's major players, MGM Grand seems alone in that it has not felt Wynn's public wrath, analysts said. Mirage has sued both Park Place Entertainment (PPE), owner of the Bally's chain, and Trump Hotels and Casinos (DJT). The cases against Trump were settled and dismissed Wednesday with no money changing hands.

Wynn declined to comment for this article, and a spokeswoman said the company had nothing to say beyond a one-sentence statement indicating the proposition would be discussed.

But Wynn is a man who basically built Mirage from scratch, in the process remaking Las Vegas.

Wynn came to Las Vegas in 1967, taking a job as an executive and part owner of the Frontier Hotel. Profits from a real estate deal with Howard Hughes provided the money to take a stake in Golden Nugget, a casino he would later replicate elsewhere.

In those years, Las Vegas was a city built on cheap rooms, cheap food and hard-core gambling. In 1989, Wynn opened the Mirage, a move that now seems prescient and revolutionary. With its white tigers and exploding volcanoes, the resort called out to the sort of high rollers who might drop $100,000 on a roll of the dice, just for fun.

In the dozen years prior, Las Vegas' predominant industry had been stagnant. The city attracted 10 million visitors in 1977 and 18 million in 1988. By 1999, that number had jumped to 33 million.

Before everybody falls "all over themselves with glee, they'd better step back and take a look at the players," said Davila, the Southcoast analyst. Wynn "looks to be the rival of anybody in a fight." (Davila rates both stocks strong buys, and his firm has not done underwriting for either company)

And there are some hurdles that would discourage MGM Grand from a hostile takeover fight. Regulators and state lawmakers in Nevada frown on hostile corporate takeovers in the gaming industry, given the industry's mobbed-up history and the natural pitfalls of the industry that would seemingly invite corruption.

In addition, price concerns might keep MGM friendly, analysts said. (Murrell said: "The appropriate combination is a friendly combination. We have no enemies in this industry.")

MGM Grand's offer, set to expire March 8, could prove untenable if Wynn can coax his stock price up by attempting to build a controlling stake.

The offer becomes dilutive to MGM Grand earnings if Mirage shares hit 19 or 20 and MGM had to raise its bid, said Joe Coccimiglio, analyst for Prudential Securities. (Coccimiglio rates MGM shares outperform and Mirage shares strong buy. His firm has not done underwriting for either company.)

By Davila's back-of-the-napkin calculations, a cash purchase at the current stock price would force MGM to take on an additional $236 million in debt just to make the purchase, assuming an interest rate of 7%.

"It would be a crap shoot as to whether he could put together a controlling interest," Davila said of Wynn. "I think he believes Mirage is not for sale. I can't see this thing going very easy."

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