Image: Bellagio
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Tracinda, the investment arm of billionaire investor Kirk Kerkorian, said Monday that it plans to enter into talks with MGM Mirage to buy its Bellagio Hotel.
updated 5/22/2007 7:06:37 PM ET 2007-05-22T23:06:37

MGM Mirage Inc.’s board of directors met Tuesday for the first time since Tracinda Corp., the investment arm of billionaire investor Kirk Kerkorian, announced it wanted to enter talks to buy two MGM Mirage properties and perhaps restructure the giant casino company.

Chief Executive Terry Lanni did not accept questions about the Tracinda announcement during a shareholders meeting early Tuesday, and by the afternoon the board was still meeting behind closed doors.

Kerkorian, 89, was present at the shareholders’ meeting but said nothing about the matter. He was expected to attend the board meeting as a member. Tracinda owns 56 percent of MGM Mirage shares.

MGM Mirage was expected to form a committee of non-management, non-Tracinda board members to consider Kerkorian’s proposal Monday to purchase The Bellagio Hotel and Casino and CityCenter properties. Tracinda also said in a filing with the Securities and Exchange Commission that it wants to pursue “strategic alternatives” related to its majority stake in MGM Mirage.

Bellagio is the jewel in the crown of MGM Mirage’s Las Vegas Strip properties, accounting for roughly 20 percent of its operating profits. CityCenter is its $7.4 billion megaresort being built next door and set to open in late 2009.

Shares rose 27 percent, or $17.03, to $79.98 Tuesday. Shares retreated 46 cents in after-hours trading to $79.52.

Tracinda’s announcement prompted credit ratings agencies to announce they were watching developments closely.

Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch gave MGM Mirage a negative outlook because of fears that a Tracinda-led leveraged buyout would add debt to the company.

While analysts speculated the move could be a step toward making MGM Mirage more of a casino management company rather than an owner-operator, many agreed it would also prompt a widespread re-evaluation of the company’s assets, which includes 19 properties in Nevada, Mississippi and Michigan and 865 acres of prime Las Vegas real estate.

Land prices on the Las Vegas Strip have been soaring lately.

On April 19, MGM Mirage said it bought 34 acres on the Strip for roughly $17 million per acre. A month later, on May 16, New York real estate developer Elad Group, said it bought 34.5 acres housing the New Frontier hotel-casino a little further south for roughly double that, around $35 million.

In its presentation to shareholders, MGM Mirage company executives said the market is finally getting around to properly valuing assets it acquired through megamergers, first between MGM Grand Inc. and Mirage Resorts Inc. in 2000, then when MGM Mirage bought Mandalay Resort Group in 2005.

Lanni said the Mirage merger allowed for the development of CityCenter on 76 acres of previously “underutilized acreage” at the heart of the Strip.

“We saw that inherent value I think before Wall Street,” Lanni told shareholders Tuesday. “I think people are finally recognizing what this management team recognized maybe five or six years ago.”

Chief Financial Officer Jim Murren added: “More than any other gaming asset, Las Vegas land has captivated the imagination of investors from around the world, eager to inject energy into our industry.”

The move is Tracinda’s second toward MGM Mirage in seven months. In November, Tracinda offered to buy 15 million shares at $55 each, offering a 12 percent premium to the previous day’s closing price, but shares promptly shot above the mark and traded consistently higher. Tracinda ended up buying only 444,466 shares, increasing its stake by 0.1 percent.

Analysts said Kerkorian’s move may have succeeded whether he ultimately buys the properties or not.

“It is possible these negotiations do not bear fruit and that Kerkorian could act as a catalyst for the market to recognize the value of MGM,” UBS analyst Robin Farley said in a research note. “As the owner of 56 percent of the company he would also end up a winner.”

MGM Mirage is the second-biggest casino company in the world by revenue and has investments in three properties in Nevada, New Jersey and Illinois, and is a 50-50 partner in the $1.1 billion MGM Grand Macau set to open later this year.

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