It has been less than two months since MGM Mirage
The MGM-Mandalay marriage will create a company with an estimated $7 billion in sales and $13 billion in debt. Said another way, debt will be almost twice sales. Even The Donald's Trump Hotels
Comparison with The Donald is weak, though, because Trump has operating margins of 10%. MGM, at 22%, is strong. Mandalay, with 27% margins, is the best among the major casinos. So, in the MGM-Mandalay case, two strong competitors are merging.
The merger of Harrah's and Caesars would create a company with an estimated $9 billion in revenue. But how much debt would be created? Add Harrah's total debt of $3.6 billion to Caesars' $4.5 billion, plus Caesars' market capitalization of $5 billion (if it is a cash deal), and there would be $13.1 billion in debt -- 1.5 times revenue. That looks better than MGM-Mandalay. Right?
Ah, but consider that Harrah's operating margin is 17% and Caesars is 16%. Their lower debt-to-revenue level is no advantage because of their lower operating margins.
Those familiar with gaming will note that newbie Wynn Resorts
Everyone having debt does not make it good. Remember that 9-11 emptied Las Vegas hotel rooms (and hotel rooms elsewhere) as vacationers and conventioneers stayed home. If the previous high debt levels caused the stocks to swoon on 9-11, imagine what today's debt orgy will do.
So far, it is just rumored that Harrah's desires Caesars. Maybe after doing the math, the two will conclude that staying single, or doing an all-stock deal, is their best competitive advantage.
For those wanting to see two very different views of the MGM- Mandalay combination, read these Foolish opinions:
Fool contributor W.D. Crotty does not own any of the stocks mentioned -- but W.D. has been known to enjoy Las Vegas.