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How Did It Double?
Bid. Raise. Call. These are things that do not just happen in Mirage's poker rooms. Rather, it is what the corporate titans in the casino industry have been doing over the past several weeks with their stocks on Wall Street.
Mirage Resorts operates several large casino resorts around the country. Some of the properties in its portfolio include:
Income Statement
The gaming industry has seen significant consolidation in the past several years, and it comes as little surprise that the merger activity has continued its frenetic pace. Over the past four years the number of major players in the industry has been roughly sliced in half thanks to all the merger activity, and Mirage is the latest company to get assimilated into another company.
There may still be a little money to be made in buying Mirage before the merger is completed. So-called "arb" opportunities are inherently short term in nature, yet they can be worth keeping on the radar. Investors need to figure out the price of the deal, the timeframe of the deal, the probability of any given deal actually going through, and assume where the underlying stock would end up if the deal fell through. If one can get a 5-10% return for a 3 to 6 month investment, it is worth researching further.
Ticker: (NYSE: MIR)
Phone: 702-792-7844
Website: www.mirageresorts.com
Price (4/26/2000): $20 3/16
On February 23, MGM Grand (NYSE: MGG) made an unsolicited bid to purchase Mirage Resorts at $17 per share. Considering Mirage's stock was trading below $11 before the bid was made public, this represented a significant premium to the going market price for Mirage's shares. Soon after the announcement, Mirage surged about 35% to near $15 per share.
Not much later, reports started swirling that other casino companies like Harrah's (NYSE: HET) and Park Place (NYSE: PPE) might enter the fray and try to purchase Mirage. Like a good poker player sensing his hand was worth a bit more than what was on the table, Mirage raised the bet by rejecting MGM's offer.
MGM then saw the raise and came back with a deal Mirage could not refuse. On March 6 it was announced that MGM would purchase all of the outstanding Mirage shares at $21 per share in an all-cash deal. This time, Mirage took the bait. This meant that MGM would be shelling out roughly $1 billion more for the company than its initial offer price. This is high-stakes poker at its best, Fools.
Today, Mirage's stock is sitting just below the $21 purchase price while the loose ends of the merger are tied up before the deal is consummated. In other words, Mirage shareholders watched their stock almost double inside a month.
Business Description
Property Location Hotel Rooms
Mirage is in the midst of being bought out by fellow gaming industry titan MGM Grand. Mirage shareholders are scheduled to get $21 per share when the deal is completed sometime in the next couple months.
The Mirage Las Vegas, NV 3,044
Bellagio Las Vegas, NV 3,005
Treasure Island Las Vegas, NV 2,885
Golden Nugget Las Vegas, NV 1,907
Monte Carlo (50% interest) Las Vegas, NV 3,002
Beau Rivage Biloxi, MS 1,780
Golden Nugget Laughlin, NV 304
Financial Facts
12-month sales: $2,476.6 million
12-month income: $164.7 million
12-month EPS: $0.87*
Profit Margin: 6.7%
Market Cap: $4,008.2 million
(*Before non-recurring items)
Balance Sheet (as of 12/31/99)
Cash: $139.5 million
Current Assets: $475.7 million
Current Liabilities: $324.5 million
Long-term Debt: $2,210.0 million
Ratios
Price-to-earnings: 23.2
Price-to-sales: 1.6
How Could You Have Found This Double?
While it is always difficult to predict exactly where mergers are going to take place, there were signs with Mirage that it was ripe for the taking. First, the company hit a rough patch operationally after opening its two newest flagship properties, Bellagio and Beau Rivage. Both properties are top-shelf assets, yet their economic return to Mirage has been mediocre at best. Mirage is not exactly known in the industry for having featherweight overhead corporate expenses, and this undoubtedly didn't help the operating profits.
Last year's earnings per share were below 1997's levels even though revenue almost doubled, meaning the company's return on invested capital has plummeted. The company's trailing return on assets is below 4%, which is far below Mirage's cost of capital. Something needed to be done to get the returns back up to par, and in this case the "something" comes in the form of new management focused on boosting profitability, not just the top line.
In short, companies that have depressed stock prices, excellent but inefficiently used assets, and the potential for significant cost cutting are often attractive bait for other firms to come in and purchase.
Where to From Here?
It looks as if the merger with MGM is for all practical purposes a done deal. Both company boards have agreed to the merger, and MGM has had no difficulty raising cash for the purchase. In fact, MGM recently raised $1.2 billion from selling shares in a secondary offering, and it has lined up another $4.3 billion in bank loans.
At first blush it appears that MGM is overpaying for Mirage based on the cash flow Mirage is currently producing. Mirage's trailing annual EBITDA (earnings before interest, taxes, depreciation and amortization) is just shy of $600 million, yet MGM's total cost, including assumed debt, is somewhere near $6.6 billion. This means that MGM is paying approximately 11x operating cash flow, which is far above the industry average of about 8x.
That said, MGM will have the opportunity to easily boost the profits at all of Mirage's properties. Beyond the typical operating synergies that come when companies merge, there is plenty of fat that can be cut from Mirage's overhead corporate expenses. It will be interesting to see just how many expenses MGM will be able to wring out of the system.
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