Just a few years ago, MGM Resorts (MGM 0.90%) had to deal with a complicated ownership structure in arguably the most valuable section of the Las Vegas Strip. The company owns Bellagio Hotel & Casino, New York-New York, and Park MGM, but it didn't own The Cosmopolitan and only owned half of CityCenter, which sat in the middle of the company's row of properties in the heart of the Las Vegas Strip.
In the last few months MGM Resorts fixed that problem. It bought the half of CityCenter that it didn't own for $2.125 billion, and earlier this week announced the $1.625 billion acquisition of The Cosmopolitan's operations from Blackstone. MGM Resorts now controls the land from Mandalay Bay all the way to Bellagio, allowing the company to connect and integrate its best assets on the Las Vegas Strip.
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MGM's latest acquisition
MGM's $1.625 billion acquisition of Cosmopolitan's operations include 3,032 hotel rooms, a 110,000 square foot casino, 243,000 square feet of meeting space, and more. The company won't own the real estate, but has agreed to pay $200 million per year in rent, which will escalate at between 2% and 3% per year over the next 30 years (with three 10-year renewal options after that).
Management said the price was just eight times adjusted EBITDA, a proxy for cash flow from a resort and casino. The multiple does include "expected operational synergies and identified revenue growth opportunities," but if it's accurate the price is attractive given that casino stocks typically trade for around 10-15 times EBITDA.
The timing of the acquisition couldn't be better for MGM Resorts. The Las Vegas Strip is reporting all-time record gambling revenue, and every casino company has talked about corporate and convention bookings for later in 2021 and into 2022 picking up. Folding The Cosmopolitan into the company's other offerings will be an advantage for MGM.
The vision for the Las Vegas Strip
Consolidation has been happening in Las Vegas for more than two decades, but this move pulls together a vast majority of the south end of the Las Vegas Strip under MGM Resorts' operations. The north end of the Las Vegas Strip is controlled primarily by Caesars Entertainment (NASDAQ: CZR), with some other owners sprinkled in, including MGM with The Mirage.
Owning adjacent resorts can help MGM book room blocks for conventions and other large events. For development purposes, it could also enable MGM Resorts and its real estate partners to develop new properties. At the end of the day, controlling a string of casinos on the Las Vegas Strip is an enviable position for MGM Resorts.
MGM is expanding aggressively
Over the last decade, we've seen MGM Resorts monetize real estate and add new casinos in Las Vegas and around the country. This is another move in that direction. I could imagine the expansion continuing and turning MGM Resorts into a real growth stock.
The first thing to be resolved will be how MGM wants to grow in online gambling. The company needs to determine how it's going to play DraftKings' (NASDAQ: DKNG) $22 billion offer to buy its 50/50 BetMGM partner Entain (LSE: ENT), a deal it has to consent to. As I wrote last week, MGM could end up acquiring the half of BetMGM that it doesn't own, another expansion in the gambling industry.
MGM Resorts is in a powerful position in the gambling market, especially on the lucrative Las Vegas Strip. If gambling keeps booming in the U.S., the stock could continue its strong performance.
