MGM's New Resort Project Is Great

By Matt Koppenheffer | More Articles
June 17, 2009 | Comments (1)

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If there's one thing that I don't want to see a company like MGM Mirage (NYSE: MGM ) doing, it's plowing perfectly good money into a new resort. Why? It's simple. The company already has far too much debt and its management team is frantically trying to pull off some very impressive moves to keep it from going bankrupt.

As I pointed out earlier in the month, the company -- along with competitors like Las Vegas Sands (NYSE: LVS ) and Wynn Resorts (Nasdaq: WYNN ) -- needs to take the cash that it does make and plow it into debt repayment. In short, new capital commitments are a big no-no.

So why is it that I'm a fan of the proposed MGM Grand New Giza in Egypt? It's not because it's slated to be built near the base of the famed pyramids of Giza. (Frankly, I think that's a little perverse.) Rather, it's because this project isn't going to cost MGM a dime. You heard me right, not a single dime.

In 2007, the company formed MGM Mirage Hospitality, an arm of the company that will leverage the MGM brand and the company's management expertise to strike deals to operate gaming and nongaming properties that are externally financed. While New Giza is the most recent of these deals, MGM is also working in a similar capacity on resorts in Vietnam, Abu Dhabi, and mainland China.

The beauty of these deals is that it is a way for MGM to grow revenue, expand its brand presence, and leverage its strengths without having to jack up that debt load any further. And let's face it, there isn't a whole lot of competition within the gaming sector for this kind of service. Wynn and Las Vegas Sands might be able to pull something like this off, but the Ameristar (Nasdaq: ASCA ) brand and the Boyd Gaming (NYSE: BYD ) brand don't exactly have the same kind of international cachet.

So kudos to you, MGM. Your balance sheet still scares me, but you've still got some smooth moves.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy wishes Station Casinos hadn't gone the leveraged buyout route. Poor Station.

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Report this Comment On June 18, 2009, at 12:16 PM, spokanimal wrote:

The problem with MGM is that the majority of their assets are on the strip. The strip may become more stable, or even grow some, over the next few years but the massive capacity coming on stream over the next year and the increasing "drive-up" capacity in CA means that Vegas has finally matured into a less profitable venue.
The new frontier is the far east. Not only are the economies there relatively strong but there are huge populations with a cultural propensity toward gaming. The industry is still fledgling and tightly zoned there and the growth thus far has been torrid. Only one American company has sought to exploit it in a big way thus far and it isn't MGM or Steve Wynn... it's the guy who spent his childhood cornering the market on street-corner, newspaper sales in Boston... a guy who knows it's all about location, location, location.
Spokanimal

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