TMF Interview With
MGM Grand CFO Jim Murren
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)
August 13, 1998
Our guest this week is Jim Murren, executive vice president and CFO of hotel and casino operator MGM Grand (NYSE: MGG). The casino's namesake hotel and casino is located in Las Vegas with a sibling located in Darwin, Australia. The firm also manages casinos in South Africa and has a 50% stake in the New York-New York Hotel & Casino in Las Vegas.
TMF: Thank you for joining us, Mr. Murren.
Murren: Thank you very much.
TMF: Let's start out with a general question. How is the overall casino industry doing right now?
Murren: We're having a pretty good year out here from a volume standpoint in Las Vegas, and we've never been busier from a hotel standpoint as well. So, I'd say that from an activity standpoint we're packed to the gills here and very happy with our results.
TMF: What would you say are some of the biggest challenges facing the gaming industry as well as MGM Grand?
Murren: There are quite a few actually. One would be our dependence upon international travelers and international play. The Asian "meltdown" has negatively impacted the baccarat business in Las Vegas, which is the high-end business. It's had an impact on all the Las Vegas operators that deal to that segment. At the MGM, we've been working like crazy to build up our business in other parts of the world, such as Europe, Latin America, and the Middle East, to offset the declines in Asia. But we see no improvement in the Asian business at all, and that is one big challenge.
The second challenge would be that Las Vegas periodically goes through large building booms, and we're at the eve of one right now, where we're going to add some 20,000 hotel rooms to the city on a base of 105,000 rooms right now over the next two years. That obviously will cause absorption problems, and some operators will not do well, and they'll see their occupancies drop. So, that's another challenge -- to try to maintain an active property and actually build market share.
"At the MGM, we've been working like crazy to build up our business in other parts of the world, such as Europe, Latin America, and the Middle East, to offset the declines in Asia."
The third challenge would be to grow. In an industry that is highly regulated and restricted in terms of where we can operate, there are very few good growth opportunities. In the case of MGM Grand, we're very fortunate because our growth includes an outstanding opportunity in Detroit, Michigan where we will likely open a casino next year, in Atlantic City where we'll be in the early part of the next century, and in management contracts such as what we're doing in South Africa.
TMF: Going back to the Asian financial crisis, could you expound a little bit on the importance of Asian customers to MGM Grand, and also has the crisis changed any of your internal goals or plans?
Murren: That's a good question. The Asian business to us is important because we're one of the few operators in Las Vegas that are very large high-end players, meaning that we do a very large market share of the high-end business in town. We have about 20% market share of that high-end play. Within that segment, the Asian customer has been somewhere around 30% to 40% of that business.
The problems in Asia have had a big impact on customers' willingness and ability to play in Las Vegas. That has impacted most of the operators like MGM, Mirage, Hilton, Caesar's, Rio -- the casinos that play to the high end. We see absolutely no improvement in the high-end play and don't expect to see any improvement in the high-end play as it relates to Asia for at least another year and maybe longer. It has impacted the way we operate our business here.
Luckily, about a year and a half ago, MGM embarked upon a massive expansion to our property here. We're spending over $550 million right now -- we're almost done actually -- where we added a conference center, we've renovated our rooms, we've added more retail space, and we're diversifying away from simply the high-end business. So, we're looking for other ways to make money as a casino resort. That is why our volumes in our overall business activity are actually up in spite of the weakness in Asia.
TMF: There's been quite a bit of consolidation in the industry recently. How does MGM fit into this consolidation trend?
Murren: In my old life, I was an analyst for 15 years covering this group, and I always was of the opinion that consolidation would take place because in many cases it's just cheaper to buy than it is to build. In many instances, it's the only way to provide good growth. There has been a lot of consolidation lately, and I think there will be a little bit more to come.
The way MGM fits into the picture is quite interesting, in my view, if I were looking at it from the outside looking in. We have at MGM the best balance sheet in the gaming industry by a major factor. We're so strong in fact that just two days ago we bought 6 million shares of our own stock at $35 a share for $210 million. Even after buying that stock, we have the best balance sheet in the gaming industry. We have $150 million in cash. We have $500 million of debt. We have a $1.5 billion credit line with our commercial banks, which we haven't even touched. We have the lowest debt-to-capital, debt-to-equity ratio in the industry, and we have a major shareholder Kirk Kerkorian that owns 70% of our company.
MGM has a great location here in Las Vegas -- 115 acres. We have a great brand name, and we have very good growth opportunities. We are also quite a pragmatic company where we think we can grow and grow this company internally. We may grow it also via acquisition, but we're not in love with any asset that we own, and we're not empire building here. Our simple motivation is to increase shareholder value, and it's quite simple because that's how we all get compensated. Stock goes up, we all do well, as well as our larger shareholders that obviously would do well.
"We have at MGM the best balance sheet in the gaming industry by a major factor."
TMF: Speaking of the share buyback, why did you choose to allocate the capital towards buying back the shares rather than plowing that capital into some of the developments you mentioned earlier?
Murren: We're doing both. Because of our balance sheet, we've believed that at this point in time when we looked at all the acquisitions that were out there and available -- and we looked at everything, believe me, I did the analysis on every public company, every private company, every piece of every public and private company -- we concluded that the better return on investment at this time was to buy our own stock than to buy anybody else. It's more accretive to us, and we will not at MGM do a dilutive deal.
Some of the deals that have been done, I think, are bad deals, and in my old life, I would have been very critical of them. In my new life, I'm a nice guy and I don't speak ill of my competitors. (Laughter.) But I think that a lot of deals were done just to do deals rather than done for good financial sense.
At MGM we looked at everything, and we concluded that the better return on investment was to buy our own stock, but we would not have bought one share, let alone 6 million, if we didn't firmly believe two things: One, that our stock was worth a lot more than $35 a share. Two, that we would be able to grow the company internally, and buying the stock has in no way inhibited that growth. For example, as I say, we're concluding a $550 million expansion to this property here in Las Vegas. We'll be done with that in the first quarter of '99. We are going to spend ultimately over $800 million in Michigan beginning with a temporary casino in Detroit that's going to cost over $100 million next year. We intend to spend around $800 million in Atlantic City over the next several years as long as we get the land that we're trying to accumulate and access. So, we see a lot of opportunity to grow.
We can do not only the buyback we just did, but we also announced that we would consider buying more stock, another 6 million shares. We can buy all the stock that we've announced that we've authorized to buy and build everything that we've just talked about -- expand in Las Vegas, build in Detroit, build in Atlantic City, while we develop management contracts in South Africa -- and still have an investment grade quality balance sheet.
TMF: I was in Las Vegas last year and spent a great deal of time in New York-New York. How is that doing for you?
Murren: We're really proud of the property. As you may know, we own 50% of that. Our partner is Primadonna Resorts, and it opened up on January 3 of last year, and it was a food fight. It blew the doors off of any model that we ever had for it and generated $130 million of cash flow in its first year of operation on a $460 million investment. Most analysts, myself included at the time, thought it would do about $80 to $90 million of cash flow -- to give you a sense of how successful it was. It's an irresistible property and you cannot come to Las Vegas -- I defy anyone to come to Las Vegas -- and not visit New York-New York. It just looks so interesting from the outside, and I think we carry that imagination through when you go inside the building.
This year it's down from last year's results. It'll probably generate -- and this is a forward-looking statement so don't believe it -- but it will probably generate around $100 million of cash flow this year. I'd say $90 to $100 million, and it's done $50 million or so in the first six months of the year and doing better than any of its competitors. Its peer group would be properties out here like Monte Carlo, Treasure Island, Luxor, and Excalibur. And even though New York-New York only has 2,035 rooms -- I say only, that's small by Las Vegas standards; the other properties have far more rooms -- it's generating more profit than the other properties.
TMF: Going back to your former life as an analyst, could you tell us a little bit about why you jumped from Wall Street into private industry and what you might have learned along the way?
"I made the jump and took a pay cut, got a bunch of options and took a risk, moved my family out from Connecticut, and we're basically betting the family on the company."
Murren: I knew the market was going to tank. (Laughter.)
TMF: Where were you a year ago? (Laughter.)
Murren: As I say, I covered this industry for many years and have always been interested in the casino industry because I love development, I love construction development, and I love the service business. I got to know all the managements in this industry. It is a great opportunity to have a bird's eye view on how all the companies were being managed. I got particularly close to the management of MGM Grand and was involved in a number of the financings that the company did over the last several years. I really believed at this point in my career that I needed to, rather than be kind of outside the candy store window with my nose pressed against the glass, I wanted to get in the game a little bit.
I made the jump and took a pay cut, got a bunch of options and took a risk, moved my family out from Connecticut, and we're basically betting the family on the company. I'm excited and working harder than ever -- this is the part I didn't realize, that I'd be working harder than I was before. That was a rude awakening, but I'm having a blast.
TMF: You just wanted to live in Vegas, right?
Murren: Yeah, that's me. I'm going to slick back my hair, get the gold chains� (Laughter.) I tell you, it's hot as heck out there, but it beats the heck out of the humidity and the freezing cold and everything else I was dealing with back in New York.
TMF: Unfortunately, we're out of time. Thank you very, very much for sitting down and talking with us today.
Murren: It's a pleasure. I want to invite all your friends out to Las Vegas and out to the MGM. We are the city of entertainment, and we hope to impress you all.
TMF: We hope to come.
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