Casino Connection Nevada

SPLITSVILLE?

Bad earnings report sparks speculation of MGM Mirage divestiture

by Staff

It began as an innocent  comment from MGM Mirage Chairman Terry Lanni when he was asked about the high multiples of hotel companies as compared with gaming companies. He admitted to being frustrated by the disparity and then said: “If that continued to be the factor we could certainly split the companies.”

The discussions occurred during a long conference call to talk about the bad first quarter recently turned in by MGM Mirage. With earnings dipping by 30 percent in the quarter, Lanni was explaining ways to improve the fortunes of the company.

“The first quarter was obviously challenging,” he said. “It was clearly impacted by the economy.”

But Lanni pointed to lower earnings by most gaming companies and said the first quarter was really “pretty good” considering the circumstances.

“These are tough times, but not impossible times,” he said. “The economy could be better, but that’s something we have to deal with. This is where management earns their salaries.”

Jim Murren, the company president and former CFO, explained why a split was even being considered.

“The key for us is with the balance sheet that we have and the way we want to reinvest our business how we build our build on that growth,” he said. “We are a capital-intensive business and we think we can outthink our competitors in that area. We have in the past and our cash flows and our existing casino resorts we believe will continue to increase over a period of many years.”

Murren said the non-gaming side of the business is growing quickly, however.

“Layered on top of that is the growth of MGM Mirage Hospitality,” he explained, “which starts out with zero and growing into what we think over time will be a very large company, which will not be capital-intensive, generating a significant amount of development in fee income. That, of course, is the type of income that gets the higher multiple in the marketplace.”

While most analysts expect a split of the company at some point, the wild card in the MGM Mirage equation is majority shareholder Kirk Kerkorian. Known for his dramatic moves to increase shareholder value, Kerkorian has been notably silent since he proposed to buy Bellagio and CityCenter, until MGM Mirage brought in Dubai World to help fund CityCenter and other projects.

But some question how long he will sit on the sidelines.

“He is definitely the X-factor for the company,” Deutsche Bank gaming analyst Bill Lerner told the Las Vegas Review Journal. “Kerkorian transcends the company’s fundamentals. If it wasn’t for him being in the picture, I think the company is trading lower than it is now.”