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In medicine, when a person constantly engages in binge eating followed by purging, it's called bulimia nervosa. In business, when a company does the same thing, it's called MGM Mirage (NYSE: MGM ) .
Over the years, MGM Mirage has expanded aggressively via acquisitions and new construction, becoming so bloated with debt -- $13.5 billion by the end of 2008 -- that it has restructured borrowings and shed assets.
But it continues expanding by building CityCenter, the giant casino/hotel/condominium complex due in late 2009, amid financing disputes with its Dubai-based joint venture partner.
It's a high-wire act that would be challenging for the acrobats performing at one of MGM's casinos. Investors would prefer being spared the debt-defying leaps that have shoved the company's credit rating deep into junk bond status and have flattened its stock into single digits. The stock is trading at around 10% of its 52-week high.
Been there, done that … often
MGM's appetite for expansion isn't unique to casino operators -- and neither are the side effects. Las Vegas Sands (NYSE: LVS ) has had to raise more capital in the public markets and make a preferred stock/warrants deal with the company's principal shareholder. The private Harrah's Entertainment just completed a debt exchange to ease pressure on its balance sheet. Just this week, Wynn Resorts (Nasdaq: WYNN ) also amended its debt agreements to gain some breathing room. The private Herbst Gaming is now in bankruptcy reorganization.
Plus, MGM Mirage has always done things in a big way, from its start in 1986 as the MGM Grand Hotel. It merged with Mirage Resorts in 2000, then sold a bunch of casinos from 2004 to 2007. It also bought the Mandalay Bay Resort Group in 2005, adding 12 properties and 50% stakes or majority stakes in four casinos.
Early this year, it sold another casino. The Wall Street Journal has reported that the company is considering selling casinos in Detroit and Biloxi, Miss. MGM Mirage would only say that it will "explore all available options and will develop a comprehensive strategic plan."
But big questions loom: What sort of price can MGM Mirage get in the middle of a recession? And how will residents and tourists in Las Vegas respond to CityCenter while the U.S. economy and the Las Vegas economy sag?
All of the wheeling and dealing, real and rumored, has taken a toll on shares. This month, the stock has been very volatile on extremely high trading volume.
Some buyers probably figured things couldn't get any worse despite the grim forecasts by credit-rating firms, four sell-side analyst downgrades since February, and a Wall Street consensus for holding or selling the stock. If MGM Mirage files for Chapter 11, equity holders are last in line. And let's not forget that the Journal recently reported that the company's woes have attracted the interest of corporate raider Carl Icahn.
Right now, you need to be an eternal optimist, or you need the intestinal fortitude of a day trader, to invest in MGM Mirage. Long-term-minded investors should tread cautiously.
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