Casino deal to challenge rivals
By Matt Krantz
USA Today
Bigger is certainly better in Las Vegas: Visitors flock to the biggest slices of prime rib, the biggest shows and the biggest casinos. And that's why the agreement announced yesterday between Mandalay Resort and MGM Mirage to form the world's biggest casino operator is an affront to the casinos it would leapfrog.
If MGM Mirage's landmark purchase of Mandalay gets a green-stamp from regulators, top rivals Caesars Entertainment and Harrah's Entertainment will suddenly find themselves operating in the shadow of a casino behemoth that controls a bulk of the hotels on the Strip.
"This combined company will have strategic advantages that make it tougher for everyone else to compete," says Barbara Walchli, portfolio manager of the Aquila Rocky Mountain Equity fund. She says the merged company could lure gamblers with promotions rewarding them for loyalty to casinos that are part of the empire.
That's just the beginning of how the odds for these companies could change if the $4.8 billion deal goes through:
Caesars. From a sheer vanity standpoint, this operator of casinos including Caesars Palace and Bally's is the clear loser. It would lose not only its perch at the top of the global casino industry but also its stature as the goliath in the Las Vegas Strip's lucrative south end.
The timing couldn't be any worse. The company is making costly upgrades to its properties to return them to the opulent standard set by the Strip's newer casinos.
That heavy investing, which includes the signing of Celine Dion as a resident performer, had caused the company to pile up $4.4 billion in long-term debt.
So Caesars won't likely be able to follow MGM Mirage's push to gobble rivals. Its hands are tied until it can complete its makeover, which could take a year or more, says John Miller, portfolio manager at Ariel.
He thinks Caesars' turnaround will be successful. But only then will it be able to consider an acquisition on the Strip. "Caesars will look around and see what their next step is," he says.
Robert Stewart, spokesman for Caesars, declined to comment. Shares of Caesars rose 11 cents to $14.32 yesterday.
Harrah's. While Harrah's is the biggest casino operator behind Caesars, it's one of the least affected by the merger. Unlike the others, Harrah's has spread its interests among 25 casinos in 13 states. Only two of its casinos are based on the Strip.
If anything, Harrah's could be the opportunistic buyer of any properties that regulators force MGM Mirage to jettison to get its deal through, says Joseph Greff, analyst at Fulcrum Global Partners.
But Harrah's is mum on its plans. "We're always looking for a good opportunity in a new market," says spokesman Gary Thompson. Shares of Harrah's rose 31 cents to $53.30.
If there's anything for sure, MGM Mirage's move has launched an inevitable period of merger mania in Sin City.
