MGM betting on diversity

Feb 13, 2008 2:49 AM

Staff & wire reports | As the MGM Grand rolls out the red carpet for high-rolling Asian gamblers in celebration of Chinese New Year, its parent company, MGM Mirage, celebrates its evolving role as developer of hotel/casinos in the international market.

A few weeks ago, MGM Mirage celebrated the opening of MGM Grand Macau, the company’s first resort casino in China. That project is just the first of many designed to remake MGM Mirage from a debt-heavy casino builder into a diversified real estate developer that uses other people’s money for expansion.

That expansion will include not only more casinos but also hotels, condos and other non-casino properties.

Masterminded by Chief Executive Terry Lanni, the strategy deviates from the traditional practice of borrowing money to build. Instead, Lanni is partnering with deep-pocketed firms in joint ventures, which allows MGM to expand more rapidly and diversify revenue while keeping a lid on debt.

The plan puts Lanni in sharp contrast to his counterparts at Harrah’s Entertainment, Wynn Resorts and Las Vegas Sands, who borrow large sums for expansion. The downside: MGM will have to share profits and lose some control over projects.

To develop the non-casino projects, Lanni created a subsidiary, MGM Mirage Hospitality. Its first deal will develop a $3 billion condo/hotel project in Abu Dhabi, part of a joint venture with Mubadala Development. MGM Mirage will invest no cash but will be paid licensing, branding and development fees in exchange for the use of the MGM name and design, construction and operational expertise. This development will provide $20 million to $22 million in annual fees to MGM, Lanni says.

MGM Mirage Hospitality will also soon be developing boutique hotels in China with partner Diaoyutai State Guesthouse – a move that will bring licensing income and the opportunity to sell the MGM name to Asian high rollers. The subsidiary is also developing a casino under the MGM Grand name at Foxwoods for the Mashentucket Pequot Indians in Connecticut; that partnership with the Pequots will also explore opportunities to develop other casinos across the U.S.

Last year MGM Mirage finalized a multibillion-dollar joint venture with Kerzner International and Istithmar Hotels to develop a new casino resort at the north end of the Las Vegas Strip. For this project, MGM Mirage will provide an $800 million, 40-acre plot of land and Kerzner and Istithmar will throw in $600 million cash, then all three partners will finance the resort’s construction, and split the operational costs and income the casino brings in when completed in 2012.

In October MGM announced it would build a $5 billion casino complex in Atlantic City, a project Lanni says could be done with partners once construction begins.

Lanni also says that by roughly 2010 he can foresee MGM Mirage Hospitality being involved in as many as 15 non-casino real estate projects around the world, several in the Middle East and Far East with Dubai World.

Last year, for $3.7 billion, Dubai World bought a 50% stake in MGM’s $8 billion multi-resort project CityCenter on the Las Vegas Strip, currently the largest privately funded construction project in the world, along with 4.5% of MGM’s stock.

Lanni told Forbes it is too early to tell how much money this non-casino business will generate, but he volunteers that some analysts have speculated the licensing and development fees could bring in $300 million to $500 million annually within a few years.

Based on the Abu Dhabi project numbers the company would need to license and develop 15 projects worth $45 billion to yield the $300 million estimate – an ambitious target, especially given the stalling of development around the world amid the credit crunch.

The deal with Dubai World was the finest example, Lanni says, of how he wants to partner on new projects. The sale of shares and part of CityCenter allowed MGM Mirage to take $3.7 billion in debt off its balance sheet and put the company in a position to partner with Dubai World on real estate developments it has planned around the world.

"Had we not done the sale to Dubai World and gone along with all of the other projects we plan to build, we would have $18 billion in debt on our balance sheet in 2010," he says. "Instead we will have $11 billion. That’s nearly $650 million in interest we won’t have to pay each year, which can go towards capital projects, paying down debt, dividends or buying back stock."

When the company purchased Mandalay Resort Group in 2005 for $7.9 billion, it bought some of the older themed properties on the Strip, including Circus Circus, Luxor and Excalibur. Those need upgrades. MGM could also do something more with the 850 acres it owns on the Strip, a quarter of which are undeveloped or underdeveloped.

Lanni says MGM’s main rival, Harrah’s Entertainment, the largest casino operator in the world with $10.5 billion in revenues, will spend the next few years paying down debt, while MGM Mirage pours its cash into refurbishing its existing casinos.

Harrah’s was recently bought by private equity firms Texas Pacific Group and Apollo Group for $27.8 billion in cash and assumed debt. "We partnered with a bank," says Lanni, when speaking of Dubai World. "(Harrah’s) married a mortgage company."