There's nothing I love more than slapping my money down on a craps table, grabbing the bones, and tossing 'em, yelling "Yo, Eleven!" I am not, however, equally giddy at the prospect of investing in MGM Mirage (NYSE: MGM). The gamble with this massive Las Vegas company is too great to take on. The company took on $8.6 billion of its $12.7 billion in debt to build its City Center, and soon thereafter, the economy went south.
If a company has tons of debt, but can meet debt service and principal payments out of earnings, I'm as cool as a Vegas lounge lizard. But MGM Mirage had $775 million in annual interest payments in 2009, and it's showing quarterly losses. That worries me, and my concern for the company is even greater because Las Vegas is all about discretionary spending. As Steve Wynn, CEO of Wynn Resorts (Nasdaq: WYNN), recently pointed out, Las Vegas is not a profitable city right now. Discretionary spending is likely to be the last kind of spending to return whenever the economy recovers.
MGM Mirage sits on nice properties, but Las Vegas resorts are commodities. They distinguish themselves on pricing and style, but at the end of the day, they're all just different theme parks that one need not even stay at to enjoy. Without anything to distinguish MGM Mirage, it's just one more dice throw that ends up showing craps.
There are other issues as well. The debt structure itself is complex. You've got players like Carl Icahn in there. Some of the debt is secured by property, some isn't. There's convertible debt in there as well. There's so much going on that it's like trying to watch what every single background character is up to in Bellagio's Cirque du Soleil show.
Controversial hedge fund manager John Paulson just picked up an ownership share in the company as well. Some may see this as a sign of hope, because Paulson loves distressed assets. Unfortunately, the whole situation is so very much in doubt that there's no guarantee that shareholders would come out whole, should there be a bankruptcy filing.
Investors who want to play in Vegas might be better off looking at Wynn Resorts, or Las Vegas Sands (NYSE: LVS). In both cases, their capital structures are stronger, and they have plays in Macau. That being said, speculative investors might find going long, or even short, MGM Mirage will pay off.
