Under 10 new deals, the largest owner and operator on the Las Vegas Strip will manage hotels abroad without spending on land or development, part of its overall effort to cut costs and risk. Several of the hotels will carry the names of the company’s famous Bellagio and MGM Grand casinos in Las Vegas.
Most hoteliers use franchising and management contracts to generate revenue at lower risk and cost. But MGM MIRAGE’s deals to brand and manage hotels built by others are a notable first for the casino operator partly controlled by billionaire investor Kirk Kerkorian. They may be the company’s only option for expansion as it continues to struggle with massive debt, which it reported at $12.36 billion as of June 30.
Major casino companies have typically grown by buying or building properties they also operate, like the $8.5 billion CityCenter project MGM MIRAGE is building in Las Vegas, which it plans to manage. The 67-acre-project, co-owned by Dubai World, starts opening in December.
"You are not going to see anytime soon these big, massive investments in brick-and-mortars in our industry, at least in the gaming industry," Gamal Aziz, who leads MGM MIRAGE Hospitality, the subsidiary in charge of the 10 contracts, told The Associated Press. "So how do you execute on your growth strategy?"
MGM MIRAGE’s answer is management and franchise deals, which Aziz said the company began considering two years ago. In most cases, the new deals do not include casinos and provide MGM MIRAGE 2 percent to 3 percent of gross sales plus up to 10 percent more if a property achieves profit goals, Aziz said.
They are an attempt to build revenue rather than grow by adding assets.
MGM MIRAGE is betting its branded resorts will attract visitors even without gambling, which now produces just more than one-third of MGM MIRAGE’s revenue. Experts said that isn’t guaranteed.
"If they’re hoping to compete with Four Seasons, that’s a high bar," said Randy Fine, a former Harrah’s Entertainment Inc. vice president who started and runs the Las Vegas casino marketing and consulting firm Fine Point Group. "That’s not going to be easy."
Even if MGM MIRAGE leads all companies in franchising and managing casinos, it will face tough competition from non-gambling hotel companies, said Fine, who helped manage four casinos for billionaire Carl Icahn before they were sold. And he said the move won’t likely generate significant revenue, perhaps $4 million per property per year.
"It’s not a bad idea — it’s just not a big idea," Fine said.
MGM MIRAGE lost $855 million in 2008, compared with a profit of $1.58 billion in 2007. And business remains slow: It lost $212.6 million during the second quarter of 2009, compared with profit of $113.1 million in the same quarter a year earlier.
"It’s going to be interesting to see if you can start with one property in a major gaming destination and then roll that out as a ‘regular’ hotel across the world," said Jan Freitag, vice president of global development for Smith Travel Research, Inc.