Updated from 10:04 a.m. EDT
upped the ante for
Mandalay Resort Group
on Monday -- and appears likely to take the pot.
MGM Mirage sweetened its takeover offer for Mandalay to $71-a-share from $68, in an offer that MGM said valued Mandalay at $7.9 billion, including debt. After a lengthy weekend of negotiations, the new offer appears amenable to both sides, with the merger a done deal in the eyes of Wall Street and MGM management, despite Mandalay's cautious reaction to the boosted bid.
The deal was seen as close to dead after Mandalay rejected MGM's original $68-a-share bid as being too risky to its shareholders on Friday. MGM originally wanted up to 15 months to close the transaction, with a penalty of just $100 million if the deal, which would be the largest-ever in the gaming industry, were to fall apart.
Under the new terms of its proposed deal, MGM Mirage said its latest offer amounts to a total equity value of approximately $4.8 billion, $600 million in convertible debentures, and assumption of approximately $2.5 billion in Mandalay debt currently outstanding. In reaction, shares of both companies were weak, with MGM off 53 cents, or 1.1%, to $47.07, while shares of Mandalay were off 81 cents, or 1.2%, to $67.61.
Wall Street Says Deal Likely
Announcing its sweetened bid, MGM said that "following discussions throughout the weekend, its management and the management of Mandalay Resort Group have agreed on all material terms of an offer whereby MGM Mirage would acquire Mandalay in an all-cash transaction."
In response, Mandalay Resort Group said that it and MGM "have discussed terms for a potential acquisition" and that "the terms would offer significantly greater assurances of closing for Mandalay's shareholders than did MGM's previous acquisition proposal."
But the deal is not done yet -- both companies will present the merger to their respective boards on Tuesday. While MGM's board will likely approve the merger, Mandalay said "neither Mandalay nor its management has entered into any agreement on this matter. There can be no assurances that a definitive agreement will be reached."
By and large, Wall Street analysts predicted the deal will be approved tomorrow.
Credit Suisse First Boston told investors "we expect Mandalay's board to accept this proposal," while Deutsche Bank said "both management teams have now agreed on all material terms of the transaction." UBS Warburg took it a step further, upgrading MGM to buy, citing synergies related to the soon-to-be completed deal. (All three brokerages perform and seek to perform banking business with the companies covered in research reports.)
"In its press release, Mandalay indicated that the terms provided significantly greater assurances the deal would close, which we view as a positive," said Eric Hausler, analyst at Susquehanna Financial Group, in a note. (Susquehanna's parent company does and seeks to do investment banking with the companies covered in research reports.)
In rejecting the previous bid, Mandalay CEO Glenn Schaeffer said: "The terms of the MGM Mirage proposal asked Mandalay shareholders to bear a far disproportionate share of the risk. It is not in the best interest of Mandalay shareholders to agree to a deal that gives MGM control over whether it closes."
The Looming Anti-Trust Issue
But while the combination of the third- and fourth-largest gaming companies would create the gaming sector's biggest player, one with control of nearly 50% of the hotel rooms on the Las Vegas Strip, it is likely to trigger antitrust concerns from regulators.
"It will be scrutinized carefully by the Federal Trade Commission," said Mike Cowie, former head of the Merger Litigation Task Force at the FTC and now anti-trust partner at Howrey Simon in Washington D.C. "Could the deal get done, though? I think it's realistic that they get it done. Where I think the focus will be is on the high-end vacation market."
Indeed, while the combined MGM/Mandalay entity would be a juggernaut on the Las Vegas Strip, it would dominate the high-end luxury market, which Cowie said could force the FTC to take a long look. If successful, the merger would put Mandalay Bay, Monte Carlo, Bellagio and MGM Grand all under the same roof.
While Wall Street analysts expect regulatory approval to take upwards of a year, given the size and scope of the merger partners, Cowie said that asset sales will likely speed along the approval process. Already, the combined MGM/Mandalay would have to sell one of its two properties in Detroit, which outlaws companies from holding multiple gaming licenses.
With a higher bid in place, a cautiously optimistic statement from Mandalay management and anti-trust concerns that are manageable, MGM's quest to create the world's largest gaming company could prove successful. But depending on the FTC's view of the competitive landscape, MGM may have to dig deep to keep the deal -- perhaps even selling Mandalay Bay to placate regulators.
"If the FTC investigates and finds a potential problem, this is a deal that seems fixable," said Cowie. "You have a menu of properties that could be divested to solve it. And there's also the possibility of divesting the Mandalay brand."