Marcial: Betting on a Buyout at MGM
Las Vegas sizzles in the summer, but casino stocks haven't been so hot. In fact, they have been losers all year, and MGM Mirage (MGM), whose shares have crashed from $73 in February to a 52-week low of 21.65 on July 15, has been among the big casualties. But since then its stock has developed some oomph, vaulting to 32.76 on July 23.
The rally in the stock is surprising because MGM—which owns the Mandalay Resort Group (acquired in 2005), plus 10 casino-hotels on the Vegas Strip and a joint-venture partnership in the Borgata casino-hotel in Atlantic City—is far from being a favorite on the Street. Of the 22 analysts who follow the company, 13 rate the stock a hold and three recommend selling it. Only six analysts rate it a buy.
So what's going on at MGM?
One pro sees a possible buyout. It's no secret that MGM has attracted the fancy of Dubai, which has acquired a 10% stake through its Dubai World group. The average price that Dubai paid for its 30 million shares, which it bought in the last 12 months, is about $85 each. The biggest stakeholder in MGM is activist investor Kirk Kerkorian, who has accumulated some 54% of MGM, or about 150 million shares. The other big stakeholders include Marsico Capital Management, which owns about 5.8%; Private Capital Management, with 3.8%; and Capital Research Global Investments, with 2.9%.
Dubai, Private Equity Might Team Up
"With the stock trading at such a discount, notwithstanding the rally in the past few days to 30 a share, there is a strong likelihood that a buyout offer for MGM at about 50 a share will surface," says Stuart Shikiar, president of Shikiar Capital Management, which owns shares. Kerkorian, he notes, is now 91 and may be looking for a profitable exit from the stock. Given that Dubai paid a lot more for its stake, it may be thinking of doing a deal with MGM and Kerkorian for a buyout, says Shikiar. He figures that excluding the shares now held by Kerkorian and Dubai, the number of shares in public hands totals 125 million. At $50 a share, the amount needed to take MGM private, estimates Shikiar, is $6.2 billion.
With MGM's cash flow of $2.3 billion, a deal to take the company private at $6.2 billion is definitely attractive and doable, he says. MGM posted revenues of $7.7 billion and net income of $1.4 billion, or $4.70 a share, in 2007. Of late, the company has been busy buying back stock. In the fourth quarter of 2007, it repurchased some 7 million shares at $90 each, followed by another purchase of 15 million shares in the first quarter of 2008 at $80 a piece. It repurchased another 7 million shares subsequently at an average cost of $72. And in May it bought back 20 million additional shares, at $61 each.
Who would go after MGM? Shikiar believes Dubai World, probably in partnership with some Asian investors and U.S. private equity groups, may decide to pursue MGM in a nonhostile manner. Dubai has struck a standstill agreement with MGM to limit its stake to 20%. So any deal will have to be mutually agreed on between Dubai and MGM's board. Foreign investors are limited to a 15% ownership in U.S. casinos, notes Shikiar, which means that Dubai and other foreign investors will have to team with U.S. private equity groups or investors to swing a deal.
Kerkorian could be part of a group that might propose to buy MGM, says Shikiar. Apart from its 10% stake, Dubai also bought a 50% joint-venture interest in MGM's Project CityCenter development in Las Vegas. It plans to build and develop hotels and casinos, scheduled to open in late 2009, on 87 acres of land that it owns adjacent to the Bellagio Hotel.
MGM did not return calls for comment. Dubai World and Kerkorian could not be reached for comment.
MGM Mirage: Undervalued?
Shikiar isn't the only one who thinks MGM is undervalued. "The current stock price grossly undervalues MGM's assets and future projects," says Lawrence Klatzkin, an analyst at investment firm Jefferies (JEF). He has a buy rating on the stock, with a 12-month target of $102. "MGM is one of our top three picks, as it continues to develop into a diversified leisure company with limited cash needs," says Klatzkin.
But Klatzkin doesn't think Kerkorian is looking for an early exit, although he concedes that at some point he may want to do a deal. "Kirk is a very young 91 and very active, and looks like he enjoys doing what he is doing," he says. If there is a deal, it won't be soon, the analyst predicts. But a buyout could happen in the future should Kerkorian decide to retire, says Klatzkin.
Deal or no deal, the Jefferies analyst believes Dubai is "more positive on the company now than ever before." MGM, he adds, is a great investment, with its 1,300 acres of Las Vegas Strip property and other land, which Klatzkin values at $87.5 billion.
Indeed, banking on a buyout at MGM may be risky for investors. But looking at the potential players, the prospects of a deal look like a pretty good bet considering that on fundamentals alone, MGM Mirage is a solid, underpriced asset.