Same story, different day for MGM Resorts, until we hear from the board’s ad-hoc committee

September 17, 2019 10:40 PM
  • Howard Stutz, CDC Gaming Reports
September 17, 2019 10:40 PM
  • Howard Stutz, CDC Gaming Reports

Monday’s report that MGM Resorts International was considering a sale and leaseback of the Bellagio and MGM Grand Las Vegas to real estate conglomerate Blackstone Group was a little like the movie “Groundhog Day.” We keep waking up to the same news over and over again.

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At least this time, Bloomberg News attached a name to the speculated transaction.

Blackstone’s proposed acquisition of the two Strip hotel-casinos with MGM Resorts remaining in charge of the operations is reported to still be in the preliminary stages. Bloomberg Intelligence placed a value of $4 billion for Bellagio and $3 billion for the MGM Grand.

The deal, which was originally reported back in July without citing a real estate partner, was met with a somewhat ambivalent response from the investment community. MGM’s stock price closed up just 2% on the news, but the 13.6 million shares traded on the New York Stock Exchange were more than two-and-a-half-times the stock’s average daily volume.

On Tuesday, MGM shares closed at $29.59, down 10 cents or 0.34%.

“If it were to prove true in some form, we believe the development would be modestly positive for MGM and clearly positive for (casino stocks) overall,” Jefferies gaming analyst David Katz said in a research note Tuesday.

MGM formed an ad-hoc board committee in January that has been looking at ways to unlock value in the company’s real estate holdings. MGM Chairman and CEO Jim Murren said in July he was “increasingly optimistic” the committee would have answers “in early fall.”

Autumn begins on Monday.

Macquarie Securities gaming analyst Chad Beynon said the multiple on the offers MGM would receive for the two properties will be “crucial in determining whether forming the real estate committee was worthwhile.” He said a greater-than 16-times cash flow multiple is what MGM hopes to achieve.

MGM Grand Las Vegas

“But if MGM sells at (13-to-14-times cash flow), which is typically what we see for Vegas properties, then investors will likely be disappointed,” Beynon said.

A spokeswoman for MGM Resorts declined comment on the news surrounding the company. The speculative Vital Vegas blog reported over the weekend that the MGM-owned Circus Circus, on the north end of the Las Vegas Strip, was about to be sold, with Twitter-gossip focusing on Treasure Island owner Phil Ruffin. A spokeswoman for Ruffin declined comment.

Las Vegas has been known as the “Entertainment Capital of the World” for obvious reasons, but the other source of amusement the city provides is an active rumour mill when it comes to the Strip.

MGM created the ad-hoc committee, made up of three independent board members with real estate backgrounds, to address two key issues: How to deal with the company’s massive debt – nearly $15 billion at the end of June – and how to boost its sagging stock price.

“We have a lot of options in front of us, and it’s clear our real estate is mis-valued in the marketplace,” Murren said in July.

MGM’s traditional real estate partner has been MGM Growth Properties, a real estate investment trust that owns the land and buildings of 15 casinos and developments leased back to and operated by MGM Resorts.

On the Strip, MGM Growth owns six casinos and The Park entertainment and dining district. MGM Grand and Bellagio are the most notable properties not part of the REIT. Neither is Circus Circus, which sits on 25 acres adjacent to a further 70 acres which include a festival grounds and recreational vehicle park.

“The problem with Circus is who will buy all 100 acres,” said one observer.

The property needs millions of dollars in renovations. However, the location will benefit from its new neighbors: the $935 million expansion of the Las Vegas Convention Center opens in 2021, the $4 billion Resorts World Las Vegas is scheduled to open in December 2020, and the transformation of SLS Las Vegas back to the Sahara will be complete this year.

Investors like the idea of Blackstone coming into the picture as a new Strip real estate partner. The New York-based private equity firm said last week it had raised $20.5 billion for its ninth real estate fund, topping the $15.8 billion it raised previously.

The company owns the Cosmopolitan of Las Vegas, which it put on the market in April. Speculators said it could be worth $4 billion if it were acquired by a hotel company with a large database. Blackstone acquired the Cosmopolitan in 2014 for $1.7 billion and spent another $500 million toward finishing and renovating the property.

Blackstone also owns Spain’s Cirsa Gaming Corp., which it acquired last year for $1.8 billion.

“If the press report proves true, there is a positive impact on all real estate-owning gaming companies, as it adds an important new entrant to (operator/property owner) arena,” Katz said. “Overall, we expect the conclusions from the special real estate committee to drive value upside in the shares.”

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at Follow @howardstutz on Twitter.