Doubling down on Sin City (Corporate Dealmaker)

Doubling down on Sin City

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How do you stay busy while waiting for regulators to approve a $7.9 billion acquisition that will double the size of your company? If you are James Murren, president and CFO of casino and resort operator MGM Mirage Inc., you work on plans for yet another major growth initiative, this one a massive real estate development on the Las Vegas Strip with a projected cost of $4 billion. At the same time, you put the finishing touches on a $7 billion package of bank debt demonstrating that your company can easily pay for all this. "Financial sources for gaming deals," Murren says, "are wide open."

It's a funny thing. Las Vegas is back to promoting itself as Sin City, customers are flocking in from around the world to misbehave, and no company is benefiting more than MGM Mirage - which, with its pending acquisition of Mandalay Resort Group Inc. and its recently announced CityCenter project, is eagerly doubling down on the desert town. But visit Murren, 43, in his modest office just off the casino floor at the Bellagio Hotel and Casino (past the Caribbean Stud poker tables, not too far from the Petrossian caviar bar) and you find a numbers-driven operation reminiscent of Wall Street - where, in fact, Murren used to work. Financially, at least, the casino industry has come a long way from its shady origins, and even from the dicey junk bond financing that the visionary Steve Wynn employed when he first started creating over-the-top properties such as the Bellagio, which Murren's company captured in an earlier takeover.

Wynn, to be sure, is still very much on the scene, putting the finishing touches on the Wynn Las Vegas, set to open this spring. At MGM Mirage, meanwhile, tycoon Kirk Kerkorian, now 87, remains majority owner, providing overall direction and high-level assistance on deals, even as MGM Mirage chairman and CEO Terrence Lanni actually steers the company. But with a maturing industry producing deals of increasing scale and scope (MGM Mirage's agreement with Mandalay in June was quickly followed by Harrah's Entertainment Inc.'s $9 billion agreement to buy Caesars Entertainment Inc.), skills such as Murren's are increasingly needed. "Right or wrong," Murren says, "I believe my corporate finance team has a better M&A model than any investment bank out there."

Murren, a former gambling industry analyst at Deutsche Morgan Grenfell, joined MGM Grand Inc., as it was then known, in 1998. He is one of several prominent executives to have made such a move, heading a list that also includes Mandalay president and CFO Glenn Schaeffer, a former stockbroker with Dean Witter; Scott Butera, president and COO of Trump Hotels & Casino Resorts Inc. and formerly an investment banker at UBS; Scott Henry, now CFO of Las Vegas Sands Inc. and previously a managing director at ABN Amro Inc.; and Paul Chakmak, a one-time investment banker at CIBC World Markets Corp. and now senior vice president of finance at Boyd Gaming Corp.

The influx of financial talent makes sense. From the very beginning, casino companies have been reliant on large capital expenditures for renovation, expansion and new construction. "It's just the nature of our business," Murren says. Bigger companies and projects require more talent. And with the latest round of deals, the companies are getting very large indeed. Harrah's will have $8.8 billion in revenue when its merger closes, coming from its 50 or so casinos spread across the plains (Harrah's North Kansas City) to the Gulf of Mexico (Grand Casino Gulfport). MGM, No. 2 with $6.4 billion in revenue after adding Mandalay, will have 28 properties, including casino-hotels that control 50% of the rooms on the Las Vegas Strip, the country's busiest gambling market. MGM gets about half its revenue from gambling, with the other half coming from rooms, restaurants and other resort items.

Murren joined MGM as its CFO, brought in by Lanni and then-president Alex Yemenidjian. "James Murren was not your average research analyst," recalls Yemenidjian, who now runs Metro-Goldwyn-Mayer Inc., the film studio Kerkorian is selling. Murren added the president title in 1999, in a confirmation of just how important the finances are in this business. He now oversees all nonoperational aspects of the company, including treasury and corporate finance. And he leads the company's acquisition team, now 10 strong.

Not long after becoming president, Murren was in the thick of his first big deal: the pursuit of Wynn's Mirage Resorts Inc. Wynn had ushered in a new era of Las Vegas extravagance with the unveiling of the Mirage in 1989, luring in visitors by putting a spewing, man-made volcano out front. Nine years later he raised the stakes with the Italian-themed Bellagio. But a slow start for the Bellagio helped depress Mirage's stock price and set the stage for MGM to make a bid.

Deciding against an outright hostile tender, MGM delivered a "bear hug" letter directly to Mirage's board of directors in February 2000. The bid was $5.4 billion in cash and stock. "It was a public overture that empowered the board to take us seriously," Murren says. Wynn had some leverage, though, in the form of a potential white-knight bid from Harrah's. The casino czar soon delivered his own ultimatum to Murren: Get $4 billion in funding within 48 hours, or he would walk away from the offer.

So Murren holed up in a hotel room in MGM Grand's signature green-hued resort and started calling banks. Having persuaded Bank of America Corp., Citigroup Inc., Commerzbank AG and Deutsche Bank AG to provide the funding, he also threw Mirage shareholders an additional $1 billion in equity. Sixteen days after the bear hug was delivered, the companies announced a $6.4 billion deal. "The biggest enemy on the deal was time," Murren says. "We knew we had to act quickly and aggressively."

The aggressive moves didn't end after the signing. As the closing approached, Murren engineered a $1 billion MGM Grand equity offering to offset the higher price. Then, in the year after the acquisition was completed, MGM generated cost savings of $120 million, easily exceeding its estimates of $75 million.

Even as MGM absorbed the last purchase, Murren was thinking ahead to the next one. He expanded his deal team, partly by adding former Mirage executives. He refined the acquisition model for use in more complex deals. And he paid down MGM's debt, reducing it from 5.8 times Ebitda following the Mirage deal to 4.2 times by last spring.

Las Vegas, meanwhile, was surging ahead. A Gomorrah once more, it was drawing a newer, younger crowd who were jetting in on discount airlines, confident that (as the city's latest slogan puts it) "what happens in Vegas, stays in Vegas." Against this backdrop, Mandalay Resort Group loomed as the perfect target.

Run by Schaeffer and chairman Michael Ensign, Mandalay has a choice array of Vegas properties, including the Mandalay Bay, the Luxor and (at the low-roller end of the scale) the Circus Circus. Mandalay reaches nearly every segment of the gambling market, with products ranging from one-penny slot machines to pai gow poker, a pricey game popular with high-end Asian bettors. Provided the regulators went along, an acquisition would give MGM a commanding presence in the world capital of gambling.

First, though, MGM's board would need to be comfortable with the financial structures. Enter Murren's acquisition model, which is centered on an exhaustive due-diligence process in which his team picks apart the characteristics of every bond issuance under either company. For Mandalay, that meant combing through 12 different issues of subordinated notes and debentures, as well as the various amounts of bank debt the company owed. Murren's model also calls for the team to inspect each of the prospective new properties and try to anticipate how they will affect MGM Mirage's books down the road, in terms of both depreciation and carrying costs.

It was a big job, one that had to commence before any bid and continue through the traditional due-diligence period. Mandalay's total debt is $2.8 billion, and it owns or has an interest in 16 properties nationwide.

With the groundwork laid, Murren could begin preliminary talks with his counterpart, Schaeffer. A meeting between Kerkorian and Ensign soon followed. But there was still no deal, and with rumors of the discussions beginning to circulate, MGM went ahead with another bear hug, going public on June 4 with a bid of $68 per share.

Mandalay's first inclination was to terminate talks - not over the price, but over a clause MGM tried to insert in the proposed agreement, precluding Mandalay from having third-party talks over a 15-month period while MGM worked on closing the deal. That would have left Mandalay dead in the water if MGM's proposal failed to pass regulatory muster. MGM quickly dropped that request, though, and reached an agreement with Mandalay at $71 per share on June 14.

The regulatory issue is real. In Detroit, the sale of a casino would be certain, since each company has one property there and state rules forbid having two. More serious is the question of how the Federal Trade Commission will view the prospect of a single company controlling 50% of the hotel rooms on the Las Vegas Strip. The FTC is still reviewing the deal, but the industry consensus is that it will approve the union.

Certainly, the banks like the transaction. Eight institutions lined up to provide $500 million or more apiece in the bank facility, and at a much lower cost than on the previous transaction. The coupon on the Mirage deal came out in the 8% to 9% range, while the financing on the Mandalay deal came out below 6%. According to an analyst at Murren's alma mater, the company's record on the first deal is part of the reason. "MGM had proven that it had the ability to integrate their business in a successful manner, keep things quiet and have its financing close at hand," says Paul Whyte, a managing director in Deutsche Bank's real estate gaming and lodging group.

As for Murren, he continues to enjoy a job that's very different from the one he used to have. As an analyst, he recalls, he "reported to very few people, and very few people reported to me." Now, along with being president of a very large company, he is personally leading a finance team with a major role to play in its industry.

What's next? Well, besides integrating Mandalay, there's the task of making CityCenter a reality. The project will feature another massive casino and three other nongaming hotels, with a mix of residential units and retail storefronts tossed in between. The Vegas boom continues: Rival Steve Wynn is putting up a similar "urbanization" type project at Wynn Resorts Ltd. Still, opportunities for expansion inside the U.S. are limited. "One reason for these deals is the fact that the industry is maturing," Murren says. "There just aren't enough growth opportunities anymore, like there were in the 1990s."

That will probably push MGM to pursue growth the same way a lot of other big U.S. companies do once they have maxed out at home: by going international, specifically to England and the Chinese isle of Macao.

The products may include blackjack and exotic lingerie shows. But the strategy, and the deal team that's implementing it, look pretty mainstream. - Jonathan Berke

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