Updated from 7:50 a.m. EDTThe $7.9 billion cash-and-debt deal between MGM Mirage ( MGG) and Mandalay Resorts Group ( MBG) is so large that its impact can even be seen from Las Vegas' street corners, where the combined company dominates the world's largest gambling market. As expected, the merger of MGM, the third-largest U.S. gaming company, and Mandalay, the fourth-largest, was unanimously approved by the boards of both companies. Under the terms of the deal, MGM bought Mandalay for $4.8 billion in cash, or $71 a share, up from an earlier offer of $68 a share, with the assumption of $2.5 million in debt and $600 million in convertible debentures. MGM said it expects the transaction to be completed by the end of the first quarter of 2005. "This acquisition will create the world's leading gaming and leisure company with an unmatched portfolio of resorts," said Terry Lanni, chairman and CEO of MGM. "Mandalay is an outstanding franchise with top-notch properties that complement MGM Mirage's existing footprint as well as brands that are recognized and respected worldwide." Barring any asset sales and pending regulatory approval, MGM and Mandalay have a combined 28 properties -- 10 of which can be found on the Las Vegas Strip, giving it near-complete control over a three-mile stretch of gaming, concentrated mainly on the west side. Eight of the 10 casinos between Treasure Island and the Mandalay Bay casino belong to MGM. Caesars Entertainment's ( CZR) flagship casino, situated between the Mirage and Bellagio, remains the lone oasis of non-MGM gaming on one side of the street. "We are clearly bullish on Las Vegas and its potential," said Jim Murren, CFO of Mirage, "and believe the combination will better position us to meet the needs of a broad range of customers in an increasingly competitive regional and national gaming marketplace." According to research from UBS, MGM now controls 48% of the gaming positions, 46% of the square footage and 49% of the hotel rooms on the Las Vegas Strip. But, depending on how the deal is financed, the acquisition could come at the expense of shareholders and future earnings potential. MGM hasn't revealed details about the deal, but said on a conference call that the full merger agreement would be released next week.
Even at $71 a share, MGM said the deal was immediately accretive to earnings, with the combined companies having pro forma revenue of $6.5 billion last year. Banc of America Securities estimates the acquisition could add 20 cents to 30 cents a share to MGM's annual EPS, while Prudential Equity Group said it could add as much as 62 cents to MGM's earnings in 2005. Investors like the merger as well. Shares of both companies have appreciated since the takeover play began June 4, with MGM gaining 7.5% and Mandalay gaining 12.5%, but on Wednesday, shares of MGM fell 59 cents, or 1.2%, to $48.91, while Mandalay dropped 8 cents, or 0.1%, to $67.80.
Antitrust issues could dramatically change the financials surrounding the deal, especially if MGM is forced to sell assets to comply with regulators. Given the concentration of hotel rooms MGM will have in Las Vegas -- especially at the high end of the market -- the Federal Trade Commission could step in and ask MGM to sell an upscale property, which would help raise cash to pay for the deal. Already, MGM will have to sell one of its Detroit casinos -- an action included in analyst estimates on the deal -- because companies are not allowed to hold two gaming licenses in the same jurisdiction. And there could be more asset sales to come, either to comply with regulators or simply to streamline operations. Prudential Securities estimates as many as 13 properties are good candidates for sale, including a number in Nevada. But with Wynn Resorts' ( WYNN) 2,500-room Wynn Las Vegas opening in April 2005, Caesars expanding its flagship property and a number of other hotels weighing the construction of new towers, MGM's dominance over the Strip may not be such a pressing regulatory concern. "Las Vegas Strip sales may not be necessary," said Farley. "Competition on the Strip is not limited by license restrictions, so nearly 50% of the market concentration today could fall. ... By 2006, MGM/Mandalay's share could fall to less than 45%." For its part, MGM also downplayed any antitrust risks and said the company had no plans to sell assets at this time. "As for non-core assets, we'll take a look at assets as they come up -- but there won't be the opportunities at Mandalay that we saw at Mirage," said Murren. "We look at the company as a portfolio and we've been buyers and sellers. We'll take a look and do what we think is best from efficiency standpoint."