MGM Mirage's Sudden Jackpot

If stock portfolios made noise, the sound MGM Mirage (MGM) investors would be hearing right now is coins flooding out of a slot machine. Shares in the Las Vegas-based casino giant jumped 36% to 8.38 on Apr. 30, as Wall Street cheered news that financing had been secured for the company's largest-ever construction project. Of course, the one-day jackpot comes after a big downturn in the stock price over the past two years.

MGM announced after the market closed on Apr. 29 that it had repaired its relationship with Dubai World, the Middle Eastern investment firm that was the company's partner in CityCenter, a massive casino and hotel development on the Las Vegas Strip. The company said it had arranged $1.8 billion in financing to complete the troubled project. As part of the deal, Dubai World agreed to drop a lawsuit it had filed in March claiming MGM had breached their joint venture agreement and caused cost overruns at CityCenter.

It was a big win for MGM, which in March had to put wording in its Securities & Exchange Commission filing that the company might not be able to continue as a going concern. "We are pleased that MGM and Dubai World, with the strong support of CityCenter's lenders, have agreed to a comprehensive plan for the financing and completion of CityCenter," said Jim Murren, Chairman and CEO of MGM, and Chris O'Donnell, Dubai World's Director of the CityCenter venture, in a joint statement. "CityCenter is now fully funded and on track to open in December 2009."

Adding 5,900 Vegas Hotel Rooms

While MGM investors have cause to celebrate, MGM still has a long way to go to before this victory becomes a winning streak. The company must manage its huge debt load. It also has to finish construction of the CityCenter project and deal with the impact the new development will have on an already overbuilt Sin City. "There's a whole bunch of crosscurrents at MGM, at the parent level, at the CityCenter joint venture level," says Glen Reid, a casino analyst at Imperial Capital. "It's cleared the path for the full funding of CityCenter. Is that a good thing?"

CityCenter, the cause of much of the company's recent grief, is an $8.6 billion project, due to open in December. It will introduce 5,900 new, high-end hotel rooms into a market already experiencing a glut. With Vegas suffering from the double blow of a housing bust and a sharp downturn in consumer spending, rivals such Wynn Resorts (WYNN), Las Vegas Sands (LVS), and Harrah's Entertainment have recently had to raise cash and restructure debt to shore up their balance sheets. "There are a lot of bondholders who would prefer CityCenter not open," says one investment banker who works in the casino industry.

As part of its deal with Dubai World, MGM will cover cost overruns on the project above its current cost estimate. That could lead to disappointing news as CityCenter gets closer to completion. MGM also will be responsible if condo sales on the project disappoint. In March the company said it had sold $1.6 billion worth of condos, but Vegas housing prices have continued to slide this year. Units the company sold for $500,000 or more in a previous development, the MGM Grand, are now selling for just $175,000, a fraction of what MGM is asking at CityCenter. Some condo buyers may not honor their commitment to close on the CityCenter units.

Cutting Its Debt Load

MGM must also address the massive debt load at the parent company level. The company owes some $13.5 billion. MGM has taken some steps to reduce that load, selling its Treasure Island casino in Las Vegas to entrepreneur Phil Ruffin for $725 million earlier this year. MGM, which also owns casinos in Macau and Detroit, is expected to reduce its debt further either through more asset sales, an exchange of debt for equity, or some other kind of debt exchange. "That's the next leg from here," says Bill Lerner, a casino analyst with Union Gaming. "When they create additional liquidity events."

At its Apr. 30 closing price, MGM stock looks cheap relative to its historical price. Two years ago MGM shares were trading for 99. But not everyone is bullish, even at current levels. Robin Farley, a casino industry analyst at UBS Securities (UBS), has a target price of $2.50 for the stock. "With CityCenter uncertainty resolved, [investors should] focus back on MGM restructuring efforts," she wrote in an Apr. 29 report. Indeed, unless the casino giant makes real progress in cleaning up its balance sheet, investors may not see any more big payoffs on MGM stock for quite a while.

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