Strategy Process Section 090 Blog

MGM Mirage is using strategic alliances to diversify itself from a concentration in the casino business into a diversified real estate developer as well. The alliance will allow MGM Mirage the ability to more quickly grow its casino and other related hotel, condo and non-casino related properties. The good news for MGM is that it will continue to grow its business without taking enormous amounts of debt which has been the standard in the casino business. The bad news is that MGM is giving up some the control that it has had over its casino and other related projects as well as share some the profits that traditionally has taken all to itself.

This strategic alliance is one that shares the financing and background of investors and real estate developers while MGM adds its brand name and expertise in design, construction and operations. The structure of the arrangement is through a series of joint ventures between MGM's newly created subsidiary, MGM Mirage Hospitality and a series of developers/investors such as Kirk Kerkorian and Dubai World.

This strategic alliance differerentiates itself from its competitors such as Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. I believe it is a good idea for MGM to enter into this arrangement because is lowers the amount of debt and interest expense that it needs to carry on its balance sheet. The article suggests that the extra money saved can be used to upgrade its current casino and property locations.

However, the risk I see in this joint venture is that a conflict of interest over money may ultimately arise in this kind of arrangement. My suggestion is that each party have a clear understanding of the control, profit percentages and potential break-up plans in case things do not go well. With amounts that range in the billions of dollars, the stakes are very high and could make for a very messy divorce.

Attached is the article from Forbes in case the upload does not work correctly.

Title: Beyond Blackjack. By: Miller, Matthew, Forbes, 00156914, 2/25/2008, Vol. 181, Issue 4
Database: Business Source Premier
Beyond Blackjack
Contents

A Worldwide Gamble

Terry Lanni is transitioning MGM Mirage from a debt-heavy casino builder into a diversified real estate developer--using other people's money

On a brisk December evening in Macau, China, J. Terrence Lanni was all smiles. Cameras flashed as Lanni, chief executive of MGM Mirage, the second-largest casino firm in the world with $8.2 billion in estimated 2007 revenue, arrived on a red carpet to attend the black-tie opening of MGM Grand Macau. He greeted Pansy Ho, his partner in the project and daughter of Macau casino mogul Stanley Ho, with a kiss on each cheek.

After participating in several ceremonies for good luck--including one involving bowing in front of a roasted pig and then slicing into its back with a large butcher knife--Lanni retreated to a private dinner where 400 guests, including Stanley Ho and rival Steve Wynn, enjoyed shark fin soup and Kobe beef. Opera singer Sarah Brightman sang "Con Te Partiro," backed by the Hong Kong Philharmonic Orchestra. When the casino doors opened an hour before midnight, masses of eager Chinese gamblers rushed in to face their destinies at one of the joint's baccarat tables.
For Lanni the celebration marked more than the opening of MGM Mirage's first casino in China: The party capped off a stellar year for the company and its majority shareholder, billionaire investor Kirk Kerkorian, the seventh-richest man on The Forbes 400. Earnings were expected to rise 14% to $740 million for 2007; despite a post-October crash the stock ended the year ahead 46%.

But now Lanni has embarked on a new strategy that is aimed at remaking MGM Mirage from a debt-heavy casino builder into a diversified real estate developer that uses other people's money for expansion. That expansion will include not only more casinos but also hotels, condos and other noncasino properties.

The traditional casino model goes like this: borrow billions, build casino, operate casino, minimize losses at the tables, borrow against first casino, design new casino, repeat. Instead Lanni is partnering with deep-pocketed firms in joint ventures. The strategy is not defensive, he insists, but it will allow MGM to expand more rapidly and diversify revenue while keeping a lid on debt. The plan puts Lanni in sharp contrast to his counterparts at Harrah's Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. The downside: MGM will have to share profits and lose some control over projects.

To push the noncasino projects, Lanni created a subsidiary, MGM Mirage Hospitality. Its first deal will develop a $3 billion condo/hotel project in Abu Dhabi, part of a joint venture with Mubadala Development. MGM Mirage will invest no cash but will be paid licensing, branding and development fees in exchange for the use of the MGM name and design, construction and operational expertise. This development will provide $20 million to $22 million in annual fees to MGM, Lanni says.

MGM Mirage Hospitality will also soon be developing boutique hotels in China with partner Diaoyutai State Guesthouse--a move that will bring licensing income and the opportunity to sell the MGM name to Asian high rollers. The subsidiary is also developing a casino under the MGM Grand name at Foxwoods for the Mashentucket Pequot Indians in Connecticut; that partnership with the Pequots will also explore opportunities to develop other casinos across the U.S.

Last year Lanni finalized a multibillion-dollar joint venture with Kerzner International and Istithmar Hotels to develop a new casino resort at the north end of the Las Vegas Strip. In this off-balance-sheet move MGM Mirage will provide an $800 million, 40-acre plot of land to the project. Kerzner and Istithmar will throw in $600 million cash, then all three partners will finance the resort's construction, and split the operational costs and income the casino brings in when completed in 2012. In October MGM announced it would build a $5 billion casino complex in Atlantic City, a project Lanni says could be done with partners once construction begins.

Lanni also says that by roughly 2010 he can foresee MGM Mirage Hospitality being involved in as many as 15 noncasino real estate projects around the world, several in the Middle East and Far East with Dubai World. Last year, for $3.7 billion, Dubai World bought a 50% stake in MGM's $8 billion multiresort project CityCenter, currently the largest privately funded construction project in the world (see FORBES, Oct. 3, 2005), along with 4.5% of MGM's stock.

Lanni says it is too early to tell how much money this noncasino business will generate, but he volunteers that some analysts have speculated the licensing and development fees could bring in $300 million to $500 million annually within a few years. Based on the Abu Dhabi project numbers the company would need to license and develop 15 projects worth $45 billion to yield the $300 million estimate--an ambitious target, especially given the stalling of development around the world amid the credit crunch.

The deal with Dubai World was the finest example, Lanni says, of how he wants to partner on new projects. The sale of shares and part of CityCenter allowed MGM Mirage to take $3.7 billion in debt off its balance sheet and put the company in a position to partner with Dubai World on real estate developments it has planned around the world.
"Had we not done the sale to Dubai World and gone along with all of the other projects we plan to build, we would have $18 billion in debt on our balance sheet in 2010," he says. "Instead we will have $11 billion. That's nearly $650 million in interest we won't have to pay each year, which can go towards capital projects, paying down debt, dividends or buying back stock."

When the company purchased Mandalay Resort Group in 2005 for $7.9 billion, it bought some of the older themed properties on the Strip, including Luxor and Excalibur. Those need upgrades. MGM could also do something more with the 850 acres it owns on the Strip, a quarter of which are undeveloped or underdeveloped. Or it could pick up a few shares of its own stock, which, at $73, is off 27% from its fall high.

Lanni says MGM's main rival, Harrah's Entertainment, the largest casino operator in the world with $10.5 billion in revenues, will spend the next few years paying down debt, while MGM Mirage pours its cash into refurbishing its existing casinos. Harrah's was recently bought by private equity firms Texas Pacific Group and Apollo Group for $27.8 billion in cash and assumed debt. "We partnered with a bank," says Lanni, when speaking of Dubai World. "They married a mortgage company."

A Worldwide Gamble

Here are some of the casino--and noncasino--projects MGM Mirage is building with partners.

Legend for chart:

A: PROJECT
B: PARTNER
C: COST
D: LOCATION
E: OPENING

A: MGM GRAND CASINO AT FOXWOODS
B: Mashentucket Pequot Indians
C: $700 million
D: Connecticut
E: June 2008

A: CITYCENTER--MULTICASINO, HOTEL, CONDO COMPLEX
B: Dubai World
C: $8 billion
D: Las Vegas Strip
E: 2009

A: MGM-BRANDED BOUTIQUE HOTELS
B: Diaoyutai State Guesthouse
C: Unknown
D: China
E: Unknown

A: CONDO AND HOTEL RESORT
B: Mubadala Development
C: $3 billion
D: Abu Dhabi
E: 2012

A: CASINO RESORT
B: Undetermined
C: $5 billion
D: Atlantic City
E: 2012

A: CASINO RESORT
B: Kerzner International and Istithmar Hotels
C: $5 billion
D: Las Vegas Strip
E: 2012
PHOTO (COLOR)
PHOTO (BLACK & WHITE)
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By Matthew Miller
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