Gaming behemoth MGM Mirage's sudden move to engorge equally mammoth Mandalay Resort Group (which some of us still, in momentary lapses, think of as Circus Circus Enterprises) brings several chapters of Las Vegas history full circle.
In 1968, Howard Hughes aspired to own every casino of consequence in Las Vegas. This was sufficiently alarming to President Lyndon Johnson and Attorney General Ramsey Clark that they moved to block further expansion by Hughes. That helped open the door for entrepreneurs like Kirk Kerkorian who, in that fateful year of 1968, was building his first Vegas casino, the International.
Fast-forward 36 years and, in the same week that the International—now the Las Vegas Hilton—was officially unloaded to Colony Capital by Caesars Entertainment for a rock-bottom $280 million, Kerkorian consummated his biggest deal yet. His majority-owned MGM Mirage persuaded Mandalay Resort Group to capitulate to a $7.9 billion buyout, a conquest that, in scale and cost, dwarfs Kerkorian's 2000 capture of Mirage Resorts.
If the gambit passes regulatory scrutiny—as almost everyone assumes—it will radically redraw the map of the Las Vegas Strip. From Hacienda to Spring Mountain, one company will control nearly all of the west side of the Strip (with an isolated pocket of resistance at Caesars Palace), plus sizable chunks elsewhere.
Previously, three companies—MGM, Mandalay and Caesars Entertainment—controlled 70 percent of the capacity on the Strip. Now more than 40 percent of the gaming positions and half the hotel rooms will be the province of one single, gargantuan operator. What does this unprecedented concentration of economic clout mean?
Let's try to sort it out.
• MGM shareholders: Mandalay had just announced enviable first-quarter profits and, by pouncing when it did, the MGM lion gobbled up its prey before its price got out of reach. "Kirk Kerkorian has a remarkable history where, in any deal that he has ever gotten involved in with the public, he's always made them money," says Philadelphia-based investment analyst Marvin Roffman. Though Kerkorian prefers to remain in the shadows, there can be no question that he is the force to be reckoned with on the Strip. He's already done the unimaginable once, toppling Steve Wynn from supremacy at Mirage, and appears poised to do it again.
• J. Terrence Lanni: As CEO of a combined MGM/Mandalay, he would also be the de facto CEO of the gaming industry itself. His company would enjoy a hefty presence in most of America's growing gambling markets, as well as emergent international powerhouses like Macao and Great Britain. "Terry Lanni and [CFO] Jim Murren are absolutely A-1 operators. They know the business inside and out," says Roffman. Lanni's already pulled MGM Mirage out of the Nevada Resort Association, preferring to lobby the Legislature directly. By acquiring Mandalay, he doubles his constituency.
• Incumbent politicians: These companies may be in the gambling business, but they prefer safe bets. As long as Harry Reid, Shelly Berkley, Jim Gibbons and Jon Porter want to stay in Washington, challengers need not apply to MGM or Mandalay. (In races where there is no incumbent, the casino bosses hedge their bets: In the Porter/Dario Herrera face-off, MGM Mirage PAC and Mandalay Resort Group PAC donated to both candidates.)
• IGT: International Game Technology is already to slots what a merged MGM/Mandalay would be to casinos, the elephant in the middle of the room. IGT dominates the market, and this deal strengthens its hand. "The two companies get on very well," says one gaming-industry editor. "Mandalay was starting its own slot-manufacturing division [to refurbish old IGT games that the manufacturer refused to upgrade]. So IGT gets to deal with one gigantic friendly company, as opposed to one big friend and one big—and sometimes contentious—adversary."
• High rollers: Casino bosses pursue a love-hate relationship with the so-called "whales," abasing themselves before them even as they resent the high roller's ability to clean their clocks. When someone like Australian media mogul Kerry Packer has a good run at the baccarat tables, it can leave the corporate balance sheet sucking wind for months. Skittish since 9/11, "high rollers are in a position to leave better than anybody," according to Las Vegas Advisor Publisher Anthony Curtis, especially if they don't like the deal they're getting. "I already have heard stories of high rollers who have abandoned Las Vegas for other pastures." While consolidation in Vegas may give them fewer options here, they are already finding more elsewhere, including South Africa, the Bahamas, Macao and Australia, according to Curtis. Casinos resent them but desperately covet them. Advantage, whales.
• Alan Feldman: Steve Wynn's former PR honcho survived, even thrived on the Mirage-to-MGM transition, becoming the lion's public face and voice. Smoothly articulate (if sometimes inflammatory), Feldman has always made good copy for local journos. He will probably continue his ascent, eclipsing his opposite number at Mandalay, the truculent and sphinx-like John Marz.
• Mandalay shareholders: Yes, getting $71 per share is nothing to weep over. Wall Street led them to expect even more, perhaps as much as $80, but the expected bidding war never materialized. For whatever reason, Caesars and Harrah's Entertainment could not be lured into the fray.
• Mike Ensign and William Richardson: The faceless Mandalay chairmen had pretty well bailed out on the company already, liquidating most of their stock holdings long before prices spiked, missing out on a big payday. But each pocketed $46.8 million in compensation last year, which should buy a lot of crying towels. What's more, Mandalay gifted the duo with an additional 705,000 shares, as the New York Times put it, "just for showing up."
• Sen. John Ensign (son of Mike): But he's an incumbent, you say. Yes, but without Daddy there to write those campaign checks, the junior senator may have to expect less lucre from an MGM-ized Mandalay. Under Ensign Senior's stewardship, Junior received $25,000 from Mandalay's PAC over the last six years, while MGM's PAC tossed a mere $7,500 into the kitty.
• Oscar Goodman: Hizzoner crossed swords with Lanni five years ago, when the latter opposed Goodman's mayoral run. The MGM CEO made it clear, especially in the pages of The New Yorker, that he considered Tony Spilotro's old defense attorney a less than apt face for contemporary Las Vegas. If Oscar sets his sights on the governor's mansion, he probably won't find his campaign coffers swelling with MGM/Mandalay largesse.
• Nevada Resort Association: (see "J. Terrence Lanni," above)
• Non-unionized employees: Both MGM and Mandalay have handily fended off attempts to unionize Strip dealers. Only tiny, peripheral inroads have been achieved and, with 40 percent of Strip dealers under one corporate umbrella, the unionization hurdle now looks insurmountable.
• Unionized employees: MGM got off on the wrong foot with the Culinary Union by trying to open the Grand as a nonunion property. It subsequently capitulated, but the company's relationship with its premier union hasn't been smooth. In a post-9/11 panic, the company slashed thousands of employees, setting a combative atmosphere for 2002's contract negotiations. (Terrorism-related belt-tightening did not extend to MGM execs, who helped themselves to six-figure bonuses in early 2002.) Both MGM and Mandalay attempted a hard-line stance, with the former branding the Culinary "economic terrorists" and the latter accused of sending in goons to break up a union meeting. When Harrah's and Caesars quickly arrived at terms with the Culinary, MGM and Mandalay hard-liners had to fold.
The best guess seems to be that, since the deal is expected to be a slam-dunk that will give the combined company massive employment and bargaining clout, he knows which way the wind is blowing. The impending deal represents what Roffman calls "a juggernaut of power" and the Culinary may have made the calculation that a wise man doesn't get in front of a steamroller.
"If you are in basically an oligopoly environment … there's much more room for implicit price collusion," UNR's William Eadington told Casino Executive magazine in June 2000. UNLV economist Keith Schwer added, "To the extent that you increase concentration, they can increase room rates … They don't have to collude. They can essentially follow their own self-interest together. The point is, the smaller the number of major players, the easier that is to do."
Four years (and a few consolidations) onward, one would expect the same principles to hold. But, "I honestly don't feel that it's going to have much of an effect," says players' advocate Curtis. "If they're going to be controlling half of the rooms on the Strip, you're still going to have a ton of rooms to compete against them. If everybody else's rooms are filling up first, they're eventually going to have to come back [in price] to meet it."
It's not impossible, just improbable. That kind of collusion would beg numerous questions, such as: A) Is it worth MGM's trouble to beat up the balance sheet just to knock off a Riviera or a San Remo? B) Would MGM shareholders tolerate diminished dividends? C) Could MGM/Mandalay sustain an emaciated cash flow? D) Would the company's debtors—and Wall Street—want to skin it alive?
Publicly, the answer is, "No." MGM is taking a defiant stance, vowing not to divest of any properties save Mandalay's Detroit casino (which it would be compelled to by statute anyway). Privately, the company is reportedly sending out a different signal, although it's anyone's guess just what it would part with; speculation has nominated everything from Treasure Island to Laughlin's Colorado Belle to that jewel in the Mandalay crown, Slots-a-Fun.
Even if regulators don't demand that MGM/Mandalay shuck a few properties here and there, the company may do so just to help pay down debt—and anything on the Strip will bring a high premium. Don't assume that down-market properties will be the first to go, either. They serve as useful "training wheels" for execs who aren't quite ready for Vegas, and they bring useful market diversity: Much of Mandalay's recent success has been built on being able to hit the high- (Mandalay Bay), middle- (Luxor), low- (Excalibur) and super-low-end (Circus Circus) market niches simultaneously. Wynn became vulnerable at Mirage, by contrast, because his resorts were bunched at the upper end and cannibalized each other's business.
That said, don't be surprised if MGM/Mandalay decides that owning five casinos in Primm is too much of a good thing.
The answer is probably, "Not anytime soon." Although MGM executives have extolled the land-acquisition aspect of the merger, this is a company that still hasn't done anything with the tatty Boardwalk casino (and its hideous clown marquee) in almost four years. And when the purchase price is added to the existing debt of MGM and Mandalay combined, you have a company that is leveraged to its teeth.
"If you'd asked me this about any company, I would have been very nervous about the kind of debt this company is assuming to do this deal," says Roffman. He cites existing (and potential) cash flow, along with MGM's leadership, as cause for confidence, despite "my aversion to highly leveraged balance sheets [and] there's no question that there's going to be a hefty debt position here."
Given a debt load that could be approaching $14 billion by the time the merger closes, it's unclear how MGM would be able to finance new-megaresort development on top of that. With the cost of Wynn Las Vegas well past $2 billion with no end in sight, the wow factor gets ever pricier. Development of Mandalay's long-mooted "Project Z," south of Mandalay Bay, has been mentioned again—but at a tab of $700 million, which one veteran Vegas observer calls "chump change" in today's market.
Gee, that's a harsh way to put it. One or two dissenting voices have been raised, but the overwhelming consensus is that this pairing of titans will sail through. While some would argue that the agglomeration of roughly half the capacity on the Strip is monopolistic, it all comes down to what your definition of "market" is. Look for MGM to argue that the Strip is not a "distinct market." (Try telling that to all the Downtown operators who have to compete against it.) Advocates of the deal are already endeavoring to dispel any perception of "market concentration" by redefining the market in question as Nevada, the Western U.S., the entire American entertainment industry or the worldwide casino industry.
"You've still got that competition on the middle and low end," says Curtis. "So I just don't think you're going to see huge problems with monopolistic practices and pricing."
Roffman puts the deal into the bigger picture of U.S. corporate consolidation, citing the brewing industry, which is "down to two brewers now that are three-quarters of the market. You've got two domestic automobile companies left. That's just the way things are, and the gaming industry has done the same thing over the last decade."
The analyst qualifies his remarks: "I couldn't say the same if this kind of power happened in New Jersey," Roffman chuckles, later adding a cryptic, "You don't have any Eliot Spitzers in Las Vegas that I know of."
In other words, it's a done deal—unless the U.S. economy suffers another traumatic reversal. In that case, all bets are off ...