Updated from 1:37 p.m. EDT

MGM Mirage

(MGG)

wants to be king of Las Vegas, but its coronation will not be cheap -- and it may not be easy, either.

MGM Mirage late Friday announced a $4.85 billion cash bid for

Mandalay Resort Group

(MBG)

, which also calls for the assumption of $2.8 billion in debt, a merger that would create the largest gaming operator in the world -- and one with control of nearly half of Las Vegas' hotel rooms. The bid valued Mandalay at $68 a share, a 12.8% premium to Mandalay's close of $60.27 on Friday.

Shares of Mandalay skyrocketed on Monday, jumping $9.96, or 16.5%, to $70.23, while MGM's shares slid, falling $1.19, or 2.6%, to $44.84.

By and large, investors and Wall Street cheered the $7.65 billion bid, which would be the largest in the history of gaming, surpassing MGM's $6.4 billion acquisition of Mirage Casinos four years ago. The deal would create the world's largest gaming company, with MGM/Mandalay leapfrogging

Caesars Entertainment

(CZR) - Get Report

, prompting Susquehanna Financial Group to upgrade both MGM Mirage and Mandalay to net positive from net neutral. (Susquehanna does not have any investment banking interests.)

But with such a massive move, other analysts moved to lower their ratings on Mandalay, telling investors the one-day pop more than covered the value of the company. By Monday afternoon, Credit Suisse First Boston and Deutsche Bank had downgraded Mandalay, while CIBC had suspended its rating, pending more news on the deal.

In a press release touting its bid, MGM chairman and CEO said the deal offered a premium price for Mandalay shareholders and "several strategic benefits to shareholders in MGM Mirage." In response, Mandalay acknowledged MGM's proposal, telling investors in a statement that the company will respond "in due course" and "does not intend to make any further comment on this matter until it is finally resolved."

Expect the rhetoric to heat up shortly. MGM Mirage will be issuing an 8-K filing with the

Securities & Exchange Commission

at some point Monday, according to Goldman Sachs, which would force Mandalay to respond by Tuesday.

"If such a transaction were completed, this would be a 'change the landscape' major merger in the gaming industry -- combining the third and fourth largest companies," said Steven Kent, analyst at Goldman Sachs, in a research note.

Indeed, a number of other gaming names were drawing interest on Monday. The Dow Jones Casino Index was up 3.6%, led higher by Caesars, which rose 60 cents, or 4.3%, to $14.72, after Banc of America analyst Jeremy Cogan upgraded the company to buy from neutral, telling investors "the MGM bid for Mandalay could fuel questions of who's next." (Bank of America does and seeks to do business with the companies covered in its research reports.)

"Caesars could be viewed as a more likely potential acquisition candidate, by

Harrah's Entertainment

(HET)

, maybe, given its desire for increased Vegas exposure, strong brands and desire to further consolidate the industry," said Cogan.

But Harrah's isn't alone in pushing consolidation. By merging, MGM would be able to consolidate its joint-venture with Mandalay, the Monte Carlo casino, while becoming especially concentrated in the surging Las Vegas market. MGM Mirage fully owns five properties in Las Vegas, including the MGM Grand, the Mirage, the Bellagio, Treasure Island and New York-New York, while Mandalay fully owns five of its own, including Mandalay Bay, Luxor, Circus Circus, Excalibur and Slots-A-Fun.

With so many Las Vegas properties, a combined MGM/Mandalay would completely dominate a two-mile segment of the Strip stretching from the Mandalay Bay casino all the way to New York-New York.

According to estimates from Prudential Equity Group, MGM/Mandalay would have nearly $7.5 billion in annual revenue and $2 billion in annual EBITDA, with interests in 29 different properties and large tracts of land in Atlantic City and Las Vegas. All told, the combined companies would control 44% of the hotel rooms in Las Vegas.

"Simply, we believe this deal could be accretive to MGM shareholders, and possibly meaningfully so," said Cogan. "However, there are a number of moving parts, including expected cost synergies, financing

and potential asset sales ... We believe the deal could be at least neutral to earnings."

But MGM may have to sweeten its $68 per share offer, not only because the bid is unsolicited, but also because Mandalay's shares have been red hot. The company easily topped Wall Street expectations last Thursday, announcing first quarter net earnings of $87.3 million, or $1.30 a share, nearly double the $44 million, or 69 cents a share, it had a year ago, which beat the $1.12 a share expected by analysts.

In reaction to the upside surprise, shares of Mandalay jumped $5.65, or 10%, to $60.27 on Friday -- prompting a wave of rising earnings estimates, new price targets in the $70-to-$73 range and positive commentary from Wall Street brokerages. As a result of the timing, MGM's bid doesn't appear to offer Mandalay at much of a premium.

"Our sense is that this is a friendly transaction," said Michael Rietbrock, analyst at Citigroup Smith Barney. "If we had to guess, we'd expect that the two sides have been conducting late-stage discussions, which were disclosed, in part, due to the extremely strong market reaction to Mandalay's first-quarter earnings Friday ... MGM's one likely frustration is that Mandalay has timed its sale very well."

While seemingly friendly, analysts caution the deal is not a slam dunk. For starters, with Mandalay in play, analysts say either Caesars or Harrah's could step forward with a bid of their own.

And with the business overlap between MGM and Mandalay, especially in Detroit, where companies are only allowed a single gaming license, the Federal Trade Commission could withhold approval unless properties are sold. Furthermore, with properties in at least five states, the companies will have to pass muster with a number of regulatory bodies.

"Given the length of time needed to clear multiple regulatory hurdles, we believe this transaction could take more than six months to close," said Mark Abramson, analyst at Bear Stearns, in a note. "It is possible that there will be concerns about the combined concentration in several markets -- the most obvious being the Las Vegas Strip and Detroit."

Anti-trust concerns are mounting, but before those even become an issue -- MGM's bid will have to come up, as it did when the company bid for Mirage, raising its initial offer of $17 a share to $21 a share to seal the deal. With analysts already opining that Mandalay could pass $70 by Thanksgiving and investors piling into Mandalay shares early Monday, analysts say Mandalay could go for as much as $80 a share.

"We do not believe the valuation implied in this offer fully reflects the further improvement in the profitability of the Mandalay portfolio or the strategic benefit to MGM Mirage as it eliminates one of its largest competitors," said Abramson. "An offer of closer to $80 would take these factors into account."