The casino industry's two big acquirers, Harrah's Entertainment ( HET) and MGM Mirage ( MGG), are betting confidently that regulators will give their respective mergers the nod. Analysts and investors are also voicing confidence the mega-mergers eventually will get regulatory approval, but wonder whether some local developments might delay the deals. MGM Mirage must get approval from Illinois regulators for its $7.90 billion takeover of Mandalay Resort Group ( MBG), unveiled last June. But the Illinois Gaming Board currently lacks enough members to conduct a vote. MGM Mirage and Mandalay still also must sell one of their Detroit casinos to comply with Michigan regulations. Meanwhile, members of the Indiana Gaming Commission recently offered to resign amid a government shakeup, which could delay Harrah's acquisition of Caesars Entertainment ( CZR) that was announced last July and is currently valued around $10.6 billion. When Harrah's reported its fourth-quarter results last week, Gary Loveman, its chief executive, said the company remains optimistic it will complete its deal during the second quarter. MGM Mirage has said it expects its deal to close in the first quarter. Observers are generally confident, too, that federal and state regulators will give the mergers the go-ahead. The most important decision likely rests with the Federal Trade Commission, which could oppose the mergers on market-concentration grounds. If the FTC gives the go-ahead, state regulators are expected to fall in line. While nothing is a given, analysts said they increasingly have faith federal regulators won't oppose the mergers. Each merger will create even bigger Las Vegas powerhouses. The combined MGM Mirage/Mandalay will have almost a dozen properties there, while Harrah's will have seven. A key question for the FTC is how to define the gaming markets. Is Las Vegas such a global destination, and gaming now so mainstream, that the city's competitive market should include a broad range of leisure destinations like Disney's ( DIS) Walt Disney World?
"If you're expanding the market to include any entertainment option, Las Vegas concentration becomes less of a concern," said Sanjay Ayer, an equity analyst at Morningstar. "I think that's these companies' defense." (Ayer owns no shares in companies he covers, while Morningstar neither does nor seeks to do business with companies its analysts cover.) MGM Mirage spokesman Alan Feldman said the company now competes in a "global marketplace" for leisure dollars. He contends that even if regulators take a narrower view of Las Vegas, the market there alone remains hyper-competitive, even with a combined MGM Mirage/Mandalay. New players continue to jump in, he said, noting Landry's Restaurants ( LNY) recent plans to purchase the Golden Nugget in downtown Vegas. He also pointed out that all casino operators will face stiff competition from Wynn Resorts' ( WYNN) lavish Las Vegas casino, which is set to open in April. An FTC spokeswoman said the commission doesn't comment on open investigations. If the FTC weighs in positively on MGM Mirage, it's also likely to approve the Harrah's deal, given Harrah's smaller number of Las Vegas properties, analysts said. State regulators will likely take their cue from the federal government. "In New Jersey and Nevada, I don't think there's too much of an issue after the FTC signs off," said Matt Quinn, senior lodging and gaming analyst at Zack's Investment Research. (Zack's neither does nor seeks to do business with companies it covers, and Quinn owns no shares of companies he covers.) Spokespeople for Nevada's gaming regulators declined to comment. Observers were not sanguine about the Harrah's merger last year. Harrah's and Caesars needed to rid themselves of properties in several states to comply with local regulations. Analysts were skeptical the companies would be able to quickly sell off casinos at good prices. But the companies assuaged most of those worries when they announced a deal to sell four of their casinos to Colony Capital LLC for $1.24 billion.
The deal included Harrah's East Chicago Casino in Indiana, reducing the combined company's casinos there to two, and Caesars' Atlantic City Hilton, reducing their casinos in that N.J. market to four. The sale also included the Bally's and Harrah's casinos in Tunica, Miss. "Harrah's and Caesars might have satisfied its regulatory concerns in one fell swoop," said Morningstar's Ayer. "They sold four casinos in the three markets that are likely to receive the most regulatory scrutiny, and it looked like they got a good deal on that sale." Still, observers wonder whether Harrah's still faces concentration issues in Atlantic City. Based on 2004 net gaming wins, Harrah's and Caesars combined accounted for about 41% of the Atlantic City market, excluding the Atlantic City Hilton. That was down from about 49% in 2003. The decline was mostly due to the entrance of the Borgata, a joint venture between MGM Mirage and Boyd Gaming ( BYD). Although New Jersey regulators are responsible for that state alone, analysts said they may take a broad view of gaming competition in Atlantic City and note existing competitive threats in Connecticut and New York. A spokesman for the New Jersey Casino Control Commission declined to comment on how the body might rule. Harrah's spokesman Gary Thompson said the company had received no indications it would have to sell more properties. Analysts say developments in Illinois and Detroit might delay the MGM Mirage purchase of Mandalay. In Detroit, MGM Mirage and Mandalay must sell one of their two properties. Although interest in the MGM Grand Detroit and Mandalay's Motor City Casino is said to be high, observers wonder whether the companies can complete a sale in time for the merger deadline. Feldman said the companies have yet to decide which property they will sell. But he added they're confident they can conclude a deal that would appease regulators.
The five-member Illinois Gaming Board has had only two sitting members since August, leaving it without the necessary quorum to do business. The governor has yet to fill the vacancies, despite pleas from the remaining members. Even so, MGM Mirage spokesman Alan Feldman said, "We've been working with staff to find a way to make this transaction receive permission under the conditions that they now face. We're confident of our ability to close." Although Feldman declined to specify what solutions it was considering, analysts have speculated that Mandalay would be able to place its Grand Victoria casino in Illinois into a trust until the commission is fully staffed again. A similar problem could develop in Indiana, which could delay the Harrah's merger. A majority of members of the state's gaming commission recently offered their resignations to Mitch Daniels, the new governor, who is trying to purge regulatory bodies. Harrah's spokesman Thompson acknowledged that if the commission loses its quorum, it could delay Indiana's decision on the merger. "We are monitoring that situation, and the governor has so far not accepted the resignation of any of the regulators. We're still optimistic of getting the deal consummated, hopefully in May."