MGM Resorts International ( MGM) is a Fortune 500 company traded on the NYSE in the complex and unpredictable industry of gaming and hospitality. MGM is one of the leading global hospitality companies with a portfolio of 15 wholly owned resorts and gaming properties located in Nevada, Mississippi, and Michigan and 50 percent stakes in four additional properties in the US and China ( Exhibit 1). With approximately 45,000 full time employees, the company has an enterprise value of $ 18. 09 billion and 2010 revenues of more than $ 6 billion ( Exhibit 2). It is the third largest revenue generating company in its industry.
MGM believes its success is due to its reputation for delivering high quality gaming and luxury services and believes its hospitality and entertainment venues are the best in the business. 1 Previously thought to be a recession- proof industry, gaming was not only hit harder than expected by the most recent economic recession, but is on a slower than predicted road to recovery. Nevertheless, many leading analysts view MGM as a worthwhile long- term investment. In fact, within the MGM conglomerate, Mandalay Bay, Bellagio, and MGM Las Vegas experienced double- digit EBITDA growth in 2010 and were projected to grow even more in 2011. Yet, despite its isolated wins and the subtle optimism in the financial community toward the gaming industry as a whole, MGM faces significant concerns. At $ 12. 1 billion, MGM carries one of the heaviest debt burdens and shows the largest net operating losses in the industry year over year since 2007— posting losses in excess of $ 1 billion for both 2009 and 20103 ( Exhibit 3). Domestically, MGM has debt obligations maturing in 2013 and 2014. Internationally, MGM is working to offset a weak dollar with new growth ventures in China and Vietnam and has experienced higher than anticipated returns from its Macau ( China) property.
While its competitors are experiencing similar difficulties and achievements domestically and abroad, MGM also faces market share erosion as its competitors put capital toward enhancing their images against the MGM brand with more frequency and ease. Adding to its challenges and central to its recent lack of flexibility is MGM’s ill- timed massive undertaking— CityCenter. Construction began on this 68- acre, $ 9 billion joint venture on the Las Vegas Strip ( The Strip) in 2006 when American businesses could still reasonably turn a blind eye to the brewing implosion of the banking and credit markets and the subsequent ithdrawal of the common consumer from the gaming and hospitality markets. While MGM cannot be blamed for the timing of this bit of bad luck, it had to weather the storm and now must deal with the damage rendered. In a nutshell, MGM is at a crossroads that could provide the opportunity for a timely strategic evaluation; it needs to reevaluate its identity within the industry and seek opportunities that enable long- term sustainability. The company and its directors must analyze its tangible and intangible assets and determine if and where they fit within the vision for the company.
Most pressing however is whether MGM should downsize to cut its losses and how to stop the flow of market share to its competitors. Firm History Part 1: The Beginning The group of properties that comprise what is now known as MGM Resorts International began in the 60s under the leadership of Kirk Kerkorian. Kerkorian, a pilot and the owner of a small charter airline that ferried gamblers from Los Angeles to Las Vegas, began to purchase, lease, sell, and build properties, such as The Flamingo and The International, through his Leisure International Company.
In 1971, and soon after opening the world’s largest hotel at the time, Paradise Road, Kerkorian sold Leisure International to Hilton Hotels. The following year, Kerkorian began to build another hotel- casino on The Strip that would open in 1973 as the MGM Grand Las Vegas. With 2,100 rooms, the MGM Grand Las Vegas allowed Kerkorian to reclaim the bragging rights as owner of the world’s largest hotel. In 1986, Kerkorian sold the MGM Grand Las Vegas and the MGM Grand Reno to Bally’s ( both renamed Bally’s after their purchase) and, later that year, incorporated MGM Grand.
The late 80s and early 90s held several ventures for Kerkorian and MGM including the start of MGM Grand Air, a new charter airline, and the opening of the new 5,005 room MGM Grand— making Kerkorian, once again, owner of the largest hotel in the world. 4 Part 2: The Growth Years 1995– 2007 In the mid 90s, MGM riveted its attention to the booming real- estate market. Not only did it acquire property and facilities on The Strip, but also in South Africa and Australia.
Between 1995 and 1997, MGM opened New York- New York on The Strip and MGM Grand Australia in Darwin, and agreed to manage four casinos in South Africa. Looking to expand further, MGM acquired Primadonna Resorts in 1999. Later that year, MGM Grand Detroit opened in a temporary facility and ‘ The Mansions,’ high- end luxury suites at MGM Grand Las Vegas, were introduced. 5 From 1995 to 2000, net revenues grew 327 percent— from $ 722 million to $ 3. 08 billion. 6,7 This growth trend continued into the early 2000s with the $ 6. 4 billion acquisition of Steve Wynn’s Mirage Resorts.
This acquisition included Golden Nugget, Monte Carlo ( 50 percent), Mirage, and Bellagio on The Strip as well as other regional locations including Beau Rivage in Biloxi, Mississippi. With the acquisition of Mirage Resorts, MGM Grand Inc. was renamed MGM Mirage. In 2005, MGM made another large purchase acquiring Mandalay Resort Group for $ 7. 9 billion and its 16 locations including Luxor, Mandalay Bay, and Circus Circus on The Strip. The acquisitions of the Mirage and Mandalay holdings incurred large debt transactions of $ 2 billion8 and $ 2. 5 billion, 9 respectively.
In 2006, MGM announced its focus on extending the MGM brand into the development of its hospitality subsidiary, MGM Hospitality, responsible for sourcing both gaming and non- gaming investment and management opportunities. Concurrently, the company opened the Grand Macau in China. Divestments of multiple properties played a major role in accumulating nearly $ 1 billion in capital during this same period. 10 By the end of 2007, total revenue had increased 7. 2 percent and net income was an astonishing $ 1. 58 billion. However, within only 15 months of its 2007 banner year, MGM’s stock prices would plummet from $ 99. 5/ share to less than $ 2. 00/ share ( Exhibit 4). Part 3: Economic Downturn 2008 Forward In 2006, MGM had begun construction in Las Vegas on the largest private development project in US history— CityCenter: a multi- use gaming, condominium, hotel, convention, and retail outlet development. It was CityCenter that would bring MGM to the brink of bankruptcy in 2009. With many industries beginning to feel the strain of the weakening economy beginning in 2008, the majority of industry experts continued to contend the gaming industry was recession proof.
But when called on its bluff, The Strip— overbuilt and significantly funded by MGM’s growth investments— showed its hand. In 2008, MGM reacted by folding its $ 5 billion Atlantic City project and selling its Treasure Island Resort and Casino for approximately $ 775 million. 11 The $ 7 billion CityCenter project budget quickly ballooned to over $ 9 billion and MGM had to be bailed out by its joint venture partner— Dubai World. 12 To avoid negative credit/ stock ratings and continue operations, MGM needed to generate cash; however, it was in too deep on a number of projects and had no choice but to stick it out and see them to completion.
CityCenter opened in December 2009— unfortunately, to less than stellar fanfare. Stock prices fell hard and fast with impending negative quarterly profit earnings. MGM reported a net loss of $ 856 million in 2008 and $ 1. 3 billion in 2009 and saw its stock price hit an all- time low on March 6, 2009 of $ 1. 81/ share. Looking at this period in retrospect in April 2011, Chief Financial Officer Dan D’Arrigo explained it this way: We were faced with many challenges over a 24- month period.
We were focused on getting to the finish line with CityCenter and then shoring up our own finances and liquidity as it pertains to MGM Resorts. We were able to do a lot of things during that time, however, that a lot of companies could not do, including raising capital and improving our liquidity. What gets lost often is the fact that this company raised over $ 7 billion in liquidity during some of the darkest financial times when capital markets were closed. Bond markets were closed and there was no lending going on at all. . . One thing became crystal clear to us. We weren’t effectively leveraging who we are and who we were as an entity. 14 On June 15, 2010, the company officially changed its name to MGM Resorts International based on CEO Jim Murren and the board of directors’ hopes of better aligning the MGM brand with its international intentions. 15 Although 2010 ended with a net loss of $ 1. 43 billion, many industry analysts believed that, based on its fourth quarter 2010 results, MGM was on track for a return to prosperity— albeit in ten years or more.
While operations contributed positive cash flows of $ 499 million in 2010, analysts expressed short- term concerns that this was the result of a period of underinvestment in its properties due to high debt burdens. In addition, some analysts forecasted negative cash flows in 2011— further limiting MGM’s financial flexibility. To the surprise of most, when MGM released its 2011 first quarter earnings in May 2011, MGM reported increases to revenue of 3 percent and EBITDA of 15 percent. Even though a net loss of $ 90 million was reported, it was $ 7 million less than the loss reported in the same quarter the previous year.
All told, the announcement was considered by many a healthy progression compared to the previous few years. Additionally, signs of a spring thaw began to pop up in the form of improved room occupancy as well as a rebound of the heavily relied upon Las Vegas convention market. A major bright spot were the increased revenues from overseas markets with MGM Grand Macau continuing to show improvements, again reinforcing optimism around MGM. 18 Future expectations for MGM are mixed. Despite being the third largest company in its industry, MGM has the lowest profits.
Earnings estimates by top analysts show modest sales increases of 3 percent to 5 percent expected in 2011 and 2012 with year over year earnings estimated between – 0. 3 and – 0. 6 percent. 19 Already factored into their estimates, on April 13, 2011 MGM announced it would take a 51 percent ownership stake in the MGM Grand Macau. 20 Along with the potential sale of the Atlantic City Borgata, this ownership stake should result in positive liquidity of approximately $ 311 million. 21 In the meantime, management has been able to retain large assets and continue construction on properties yet to be completed.
One of these properties is the MGM Grand Ho Tram in Vietnam scheduled to open in 2013. This $ 4. 2 billion multifunctional entertainment site is located near Ho Chi Minh City near the South China Sea and features 1,100 luxury rooms22 ( Exhibit 5). The Pit Bosses MGM is a premier luxury resort and entertainment conglomerate. Many companies have portfolios similar to MGM and compete in various geographic markets with a variety of casino sizes and target markets ( Exhibit 6). MGM’s primary competitors are Las Vegas Sands, Wynn Resorts, Penn National, Boyd Gaming, and Caesars Entertainment ( Exhibits 7 and 8).
As MGM consolidated its energies and efforts to survive the economic recession amidst its massive development of CityCenter, each of these competitors staked a claim to a piece of MGM’s market share. Las Vegas Sands Las Vegas Sands ( LVS) is a gaming and convention company with properties and resorts in Nevada, Pennsylvania, Macau, and Singapore and the second highest revenues in the industry. Incorporated in 1988, LVS owns and operates The Strip’s very popular Venetian and Palazzo. LVS reports an enterprise value of $ 38. 6 billion with revenues in 2010 of $ 6. 9 billion ( up over 50 percent from 2009) and over 34,000 employees on payroll. 3 While LVS experienced net losses in 2008 and 2009 of $ 164 million and $ 355 million respectively, the company rebounded in 2010 to turn a profit of $ 599 million with an 8. 75 percent profit margin. 24 Like many of its competitors, LVS came through the recession by suspending operations that did not have the potential to quickly turn a profit. On a less optimistic note, in March 2011, LVS was subpoenaed in a joint SEC and Department of Justice investigation stemming from allegations made by fired CEO of Sands China, Steve Jacobs, that he was instructed to engage in illegal activities including bribery of foreign officials. 5 Despite this and the cautious expectations for the industry overall, LVS’s first quarter 2011 results were much more favorable than predicted with operating income reported at $ 299 million— making LVS, at least for the moment, leader of the pack. Wynn Resorts Ltd Founded in 2002, Wynn Resorts ( Wynn) primarily owns and operates Wynn Las Vegas and Encore at Wynn Las Vegas on The Strip. Additionally, the company operates two casinos in Macau that opened in 2006 and 2010. 27 Wynn hotels and casinos are considered preeminent luxury destinations.
By 2010, and with only three properties, Wynn had developed an enterprise value of $ 19 billion with over 16,000 employees. Wynn’s 2010 revenue exceeded $ 4. 5 billion with a reported profit of $ 307 million and a profit margin of 6. 77 percent. With ongoing pressure to outperform its competitors in the upper- end luxury gaming market, Wynn has successfully managed its finances by borrowing money to clear its balance sheet and delever itself by generating cash from new operations. 28 For example, Wynn created a new alliance with PokerStar, a popular online gaming poker business, to establish a new environment promoting safe online poker play.
Furthermore, Wynn has closely managed its budgets on new investments. As part of its 2009 efficiency initiatives, the construction of its casino in Macau that opened in 2010 came in $ 125 million under budget. 29 Trends in 2011 show its first quarter earnings were primarily driven by its holdings in Macau. Table game holds allowed Wynn to achieve an increase in EBITDA of over 70 percent in the first quarter 2011. With net income reported at $ 173. 4 million, in April, the board announced a cash dividend of $ 0. 50/ share. 30 Penn National Founded in Pennsylvania at the Penn National Race Course, Penn National Gaming Inc. Penn) began busi-ness in 1972 and went public in May 1994. 31 Penn owns and operates 19 casinos and racetracks in 16 different states and is primarily an acquisition- based company of mid- size casinos. Penn employs 16,000 people and has over 27,000 gaming machines. Penn’s enterprise value in 2010 was $ 4. 91 billion with $ 2. 5 billion in revenue and net income amounting to $ 47 million. Penn’s first quar-ter EBITDA for 2011 increased by 19. 7 percent to $ 178 million primarily due to new acquisitions and openings in West Virginia and Pennsylvania. 2 Boyd Gaming Corporation Boyd Gaming ( Boyd) was founded in 1975 by Sam Boyd and taken public in 1988. Over the next thirty years, it acquired 16 gaming properties in six different states. Boyd’s company vision states it is “ a billion- dollar company that retains the philosophy of a family- owned business, focused on creating long- term, sustainable growth for our shareholders. This philosophy defines and separates us from the competition, making us unique in our industry. ” 33 In 2010, Boyd had an enterprise value of $ 4. 1 billion with revenues of $ 2. billion and a net loss of $ 1. 65 billion. In the first quarter of 2011, Boyd sustained a $ 3. 5 million loss and a 36 percent increase in expenses. 34 Furthermore, Boyd announced on May 16, 2011, that The Sahara, a presence on The Strip for nearly 60 years, was officially closing its doors. 35 Caesars Entertainment Corporation ( formerly Harrah’s) Caesars Entertainment Corporation ( Caesars) is consid-ered the “ largest and most diverse casino company in the world” with operations under the Harrah’s, Horseshoe, and Caesars names. 6 Founded and headquartered in 1998 in Las Vegas, Caesars has over 50,000 employees and is the number one revenue generator in the industry.
On January 28, 2008, Apollo Global Management, LLC and TPG Capital, LP, both private equity firms, acquired Caesars and assumed its debt load of $ 13. 4 billion in an all- cash transaction valued at $ 30. 7 billion. As a result of this acquisition, Caesars stock is no longer publicly traded and complete financial data for direct industry comparison is not available. In 2010, Caesars had net revenues of $ 8. billion with a loss of $ 831 million. 37 Caesars strives to abide by the following philosophy: “ We concentrate on building loyalty and value for our cus-tomers, employees, business partners, and communities by being the most service- oriented, technology- driven, geographically- diversified company in gaming. ” Although Caesars fourth quarter 2010 EBITDA increased by 3 percent, net revenue decreased 0. 4 percent. Las Vegas occupancy at Caesars properties increased 440 basis points with continued growth on The Strip. 9 While 2011 showed modest growth— albeit with declining revenues— and after winning a court ruling to proceed, Caesars planned to move ahead with a new 27,000 seat sports arena on The Strip. 40 A Tale of Two Cultures In a review of the US based hospitality/ gaming industry, two distinct customer geographies must be addressed— the US and China— each of which drives significant revenue for the sector. The United States Within the US, populations are both aging and migrating away from Eastern and Midwestern urban areas. 1 By 2030, one in five Americans will be over the age of 65. Sunbelt states such as Florida, Nevada, and Texas have all seen significant gains in both population and new business. Despite a post- 9/ 11 slowdown owing to tighter immigration restrictions, over 1 million legal immigrants have arrived each year since 2005— numbers that will help replace and support the retiring baby-boomer workforce. 42 The recent collapse and subsequent federal resuscitation of many major US banks has put a significant strain on the nation’s economy.
Americans fortunate enough to have a job are now putting what little disposable and discretionary income they have toward delayed expenditures and reducing debts incurred during this period ( Exhibit 9). With more than 25 percent of the two fastest growing demographic segments in the US— Blacks and Hispanics— living at or below the poverty rate, 43 entitlement programs funded by the increasingly poorer federal and state governments— both of which have seen tax revenues drop significantly over the last three years— are stretched to the limit.
With the faltering economy the central focus of American discourse, local governments and populations have begun to move away from the traditional moral questions surrounding casino development of “ Should we? ” and toward “ How can we? ” ( Exhibit 10). State legislatures in Pennsylvania, 45 Michigan, 46 Indiana, Illinois, and Mississippi have seen regional casinos thrive— generating revenue and providing jobs for constituents ( Exhibit 11). 7 The trend continues with Ohio casinos set to begin operations in 2012 and expected to contribute in excess of $ 500 million per year to state coffers. 48 Of course, Nevada continues to be a force as well with casinos the largest employers in the state, a powerful lobby in the American Gaming Association, and the vocal advocacy of the Senate majority leader, Harry Reid. 49 Las Vegas continues to occupy a unique place in American consciousness. Having been dubbed “ Sin City,” it serves as a multifaceted escape.
Its marketing campaign tagline “ What happens here, stays here” 50 signifies the break from normal life it provides. The industry is now attempting to spread this feeling to casinos across the country to capitalize on the American demand for instant gratification by providing levers to pull and dice to roll. Once considered a diversion of the less virtuous, many factors are purported to contribute to the less contentious acceptance of the world of casinos, gaming, and gambling.
Among others, these include declining religious affiliations, a sharp jump in teen pregnancies, 51 a rise in prescription narcotics use, and the displacement of the traditional family by cohabitating ( both opposite and same gender) and single parents52— all considered indicators of changing socio- cultural values in the US. 53 Topped off with a mind numbing news cycle and the tacit acceptance of the wholesale erosion of privacy, the fact that casinos are no longer associated with moral or lifestyle choices but instead viewed as yet another form of entertainment is unsurprising ( Exhibit 12).
While public gaming corporations in the US are subject to the same transparency regulations of the SEC as any other US corporation, their forays into China have created issues. Most notably are potential Foreign Corrupt Practices Act ( FCPA) violations by LVS54 and MGM’s difficulties in New Jersey given its dealings with a questionable Chinese investment partner. 55 China As one of the oldest cultures in the world, China has a rich history and tradition of gambling that extends back thousands of years.
Interestingly, the oft- envisioned demand of the Chinese government for social order may in fact be what perpetuates the habit and obses-sion with gambling held by so many of its citizens. Deprived of many freedoms, Chinese have a measurable external locus of control— in other words, they “ believe that luck, destiny, chance and powerful others control their lives more than themselves. ” 56 Seemingly contra-indicated, this, in combination with proper deference to superstitions, leads to a higher illusion of control— and thus, increased risk taking, often, at games of chance.
Measuring one’s karma or virtue in this manner may also explain the large percentage of Chinese that gamble not for the money, but for camaraderie and entertain-ment. In 2010, nearly 25 million people visited the tiny 11 square mile coastal region of Macau with 88 percent of those visitors coming from China, Hong Kong, and Taiwan. 57 Unlike Las Vegas, however, nearly 55 percent of Macau visitors are “ day trippers”— visitors that arrive and leave without spending money on accommodations. China is predicted to reach the same proportion of 1 in 5 citizens over the age of 65 ten years after the US, in 2040. 8 However, by today’s population rates, that will equal 267. 9 million seniors in China as compared to only 62. 4 million in the US. 59 Complicating the issue of its aging population will be a marked shortage of working age Chinese ( as a result of China’s 1979 one child policy) to replace and support its aging population. Unlike the US, immigration has not, and likely will not, replenish China’s youth. 60 Even so, at present and in contrast to the US, urban incomes in China rose tenfold between 1991 and 200961 making China’s middle class alone the same size as the entire US population. 2 In addition to being newly affluent, China’s new middle class, at least for now, is able to both spend and save simultaneously. 63 Despite being illegal in China, there is no shortage of opportunities for those living in China to gamble. From a friendly round of mah jong with the neighbors to roaming card games to cruise ships in Hong Kong and Singapore that take passengers to international waters and set anchor, gambling has and will continue to be an integral part of Chinese culture.
Officially, casino operations are restricted to the former Portuguese colony of Macau where a tenuous balance of private interests, criminal elements, and regional government are all now being more closely watched by Beijing. 64 While a lucrative source of income for the Chinese government, many are beginning to express concern about the reasoning of officials that, because gambling is illegal, it is not possible that any of its citizens would have a gambling addiction; therefore, because it could not be a problem, no gambling addiction education, intervention, or rehabilitation is required or offered.
The Dealers In the casino/ hotel realm, there are two distinct supplier lines inbound to properties: hospitality related supplies, including everything from food to sheets to soap, and casino/ gaming specific supplies with slot machines to electronic poker to craps tables and thousands upon thousands of decks of cards. For all their consumable and durable products, the resort casinos have a large contingent of eager suppliers to choose from for anything from attresses and poker chips to staff uniforms and bottled water. 65 The cost of ultra luxury products or furnishings may still be relatively high, but with fewer buyers in the market and the promise to consider a long- term relationship, casinos are often able to leverage their size and sustainability as a customer to squeeze the margins of a supplier. In fact, in this high-profile market, even elite manufacturers of branded goods can find themselves competing for “ shelf space” inside a hotel or casino. Even top tier brands are not concerned about pricing power when a casino comes calling,” says Carleen Jorgensen, Managing Director of Brand and Consumer Marketing at Burson Marsteller. “. . . via partnership or other arrangement, they will find their way in before a competitor does to get exposure. ” 66 On the other hand, casino specific suppliers face a tough battle. International Game Technology, better known as IGT, is the most successful maker of slots and electronic gaming machines and does well with its highly diversified offering of branded machines. 7 However, IGT has faced not only antitrust complaints from rival slotmaker Bally Technologies, 68 but battles with WMS Industries, another game manufacturer, and others in casino operations and security as well. 69 Due to this lack of industry solidarity, the major casinos in Las Vegas and Macau hold the winning hand. Specialized assets such as the exclusive rights to a high demand show, popular entertainer, or even a celebrity chef are significantly more expensive on relative terms but, compared to the revenue they can generate, represent a small portion of total expenses and can pay off in spades.