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Case Study #9

MGM-Mirage – Mandalay Resorts Casino Merger

Prepared by Prof. Frank Cavico

In June of 2004, in an attempt to capture the resurgent popularity and profitability of Las Vegas, billionaire Kirk Kerkorian’s MGM Mirage announced a bid to buy rival Mandalay Resort Group, a deal, if successful, which would turn his casino company into an unprecedented giant. MGM-Mirage’s offer was $68 a share, or $4.85 billion, plus the assumption of $2.8 billion in debt, which would make the merger the largest acquisition in the casino industry.

If the merger passes the scrutiny of government anti-trust regulators, Mr. Kerkorian would dominate the Las Vegas Strip, just as it experiences a revival. He would control more than half of the 72,000 hotel rooms on the famous boulevard and most of the acreage along the west side of the Strip from its southernmost casino, Mandalay Bay, and northward for approximately two miles.

The merged company would own some of the most desirable properties in Las Vegas, including the high-end Mandalay Bay and Bellagio, and it would own more casinos in places such as Atlantic City, Detroit, and Australia.

People familiar with the merger negotiations stated that they expected a deal to be struck shortly. They also said that raising funds for the purchase would not be a problem, since MGM Mirage has a credit line of $1.5 billion and the company is likely to get further credit if necessary. Moreover, the top executives of Mandalay are willing to sell, and thus the only real question is price, these people say.

One industry analyst said the deal makes sense financially and strategically for MGM Mirage. This expert also said that there is room for the price to go higher. He stated, moreover, that he believes the merger would add to MGM Mirage’s earnings up to an offer of as high as $81 a share.

The timing of the deal arrives just as Las Vegas as entering a new phase in its storied history, illustrated by its formerly sinful roots as a home to topless shows, hot night clubs, and naughty behavior. This new, non-family, theme, combined with the resurgent economy, together with a sharp increase in discount airline’s service from the East coast, have all helped make Las Vegas a heavily visited and newly “cool” place to visit. Mandalay’s Mandalay Bay Resort has been at the heart of this new Las Vegas with its after hours clubs, array of trendy restaurants and hotels, and a vast convention center that draws visitors during the week. Moreover, the Mandalay Bay was the first to bring a well-know five star hotel to the Strip, with its Four Seasons hotel. Recently, it opened THE Hotel, a hip design style suite hotel that appeals to 20-30 old visitors who are discovering Las Vegas for the first time.

For MGM Mirage, the addition of Mandalay Bay, the pyramid-shaped Luxor, the Excalibur castle, and RV-oriented Circus-Circus, would provide a broad range of casinos from high to low end. Mandalay Bay, in particular, would allow MGM-Mirage to compete head-for-head for convention business with the Venetian casino and the Sand’s Expo convention center.

The power of cross-marketing among the casinos, especially the ability to offer loyalty “perks” through a company-wide frequent-customer program. This enhanced marketing capability would give the new merged casino giant a huge advantage over smaller competitors, such as Caesar’s Entertainment and the Venetian.

There is one very important legal issue to resolve, however, and that is whether the Federal Trade Commission would allow the two companies to merge. Even if the FTC approved the deal, it definitely is not clear that the agency would allow the combined company to keep all of its casino properties. The FTC has the power to require the sale of directly competing casino properties as a condition of approval to the deal. Yet people familiar with the MGM Mirage insist that the company is confident it can assuage government regulators’ anti-trust concerns, including the sale of a directly competing property or two.

Soon after the merger was announced, Mandalay Resort Group’s stock price rose above MGM Mirage’s $68 a share bid for the company, thereby signaling that investors expect majority owner Kirk Kerkorian to increase his offer. Mandalay’s shares traded up 17% to $70.23 following Kerkorian’s unsolicited $4.85 billion bid to create the largest U.S. casino-resort company. Shares of Ceasars Entertainment and other casino companies also rose. Mandalay may rebuff his first offer, forcing MGM Mirage to pay as much as $75 a share or even higher..

Kerkorian is 87 years of age, and owns about 57% of MGM Mirage.

The acquisition would MGM Mirage a larger piece of the meetings business in Las Vegas, where the number of convention visitors increased 11% last year. MGM Mirage would own a total of 36,000 rooms, or about one-half the total number on the Las Vegas Strip, in 11 casino resorts, as well as Mandalay’s more than one million square foot convention center.

Shares of MGM Mirage fell $1.19 to $44.84 after the announcement of the attempted merger.

Questions:

  1. Is this casino merger a legal one pursuant to anti-trust law? Why or why not?
  2. Is this casino merger a moral one pursuant to Utilitarian ethics? Why or why not?
  3. What should a merged Mirage-Mandalay Casino be doing to be a socially responsible casino resort? Discuss.

Bibliography: Herald, June 8, 2004, p. C1; Sun Sentinel, June 8, 2004, p. 3D; Wall Street Journal, June 7, 2004, pp. B1, B5.

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