Las Vegas Sun

March 28, 2024

MGM Grand strikes deal to buy Primadonna

MGM Grand Inc. and Primadonna Resorts Inc. said today they agreed to merge in a deal valued at just over $600 million.

The acquisition would give MGM Grand full ownership of New York-New York, the two-year-old Strip resort built as a joint venture between the two companies, as well as three hotel-casinos and two golf courses on I-15 at the California-Nevada border.

The deal calls for MGM Grand to exchange one share of its stock for each three shares of Primadonna in an equity swap valued at about $270 million.

In addition, MGM would assume about $232 million of debt associated with the Primm, Nev., hotel-casinos and $105 million representing Primadonna's share of New York-New York debt.

While subject to Primadonna shareholder approval, the deal is expected to sail through because the Primm family owns about 60 percent of the company. Following the merger, Primadonna Chairman Gary Primm and his four siblings would own about 12 percent of MGM Grand's 67.5 million shares.

The issuance of 9.5 million shares of MGM stock would trim billionaire Kirk Kerkorian's stake in the publicly traded company to about 62 percent from his current 71 percent, analysts said. But they expect Kerkorian to continue his periodic repurchases of MGM stock, and perhaps ultimately to take the company private.

"This is a great deal for MGM," said Dave Ehlers of Las Vegas Investment Advisors Inc.

Ehlers and other analysts said the deal would immediately boost MGM's profits. Furthermore, they said, MGM would be able to cut Primadonna's high administrative expenses and trim borrowing costs, making the deal even more savory for MGM.

Noted Jason Ader of Bear Stearns & Co.: "It looks to us like they're paying under six times EBITDA and that should be 5 percent accretive to earnings even before cost savings."

EBITDA, or earnings before interest, taxes, depreciation and amortization, is an often-used measure of a gaming company's financial health.

The two-year selloff of casino stocks has driven the share prices of many small and mid-cap operators to a multiple ranging from four to six times annual EBITDA, which is frequently called cash flow. Thus, the MGM bid for Primadonna is in line with current market valuations.

Primadonna stock jumped sharply Friday on heavy trading prompted by speculation a deal was in the works. The stock soared 65.625 cents, or 22.6 percent, to $9 a share on volume of 653,000 shares, about three times normal trading volume.

Today, though, Primadonna shares were down 25 cents, to $8.75, while MGM Grand stock rose 37.5 cents to $28.50 in late-morning trading.

"The relationship between the two companies has led to speculation for a long time that a merger might make sense," Ader said. "MGM has indicated that when they look at acquisitions, they want them to be accretive."

The speculation was also fueled by dissension among Primm family members over the drop in the company's stock price from a 52-week high of $20 to as low as $4.50 in recent months.

Another factor was the so-called "Texas shootout" provision in the joint-venture agreement between MGM and Primadonna regarding New York-New York.

The provision allowed either partner to bid for the other company's 50 percent stake in New York-New York. The partner receiving the bid had a choice: Accept the offer and walk away, or equal it and wind up with all of the Strip resort.

Had Primadonna pulled the trigger, it might have ended up shooting itself because MGM could have opted to buy rather than sell at the preferred number.

Rather than risk the loss of cash flow from a highly profitable Strip resort just as Indian gaming expansion in California threatened its Whiskey Pete's, Buffalo Bill's and Primm Valley Resorts at the border, Primadonna began talking with MGM about a merger.

An MGM acquisition of Primadonna and the full ownership of New York-New York would give it control of the two northernmost of the four corners at Tropicana and the Strip. Circus Circus Enterprises Inc.'s Excalibur hotel-casino is at the southwest corner.

Aztar Corp., which owns the Tropicana hotel-casino at the southeast corner, has also been mentioned as a takeover candidate. Its stock was off 6.25 cents in late-morning trading today.

Ehlers said MGM should be able to slash up to $40 million from Primadonna's general, sales and administrative costs, which are running between $44 million and $48 million annually.

With MGM shares trading at a multiple of about 10 times expected 1998 EBITDA, the savings alone could translate into about $400 million of stock market value.

MGM also gets about $50 million of annual cash flow from the border resorts, which, with a higher multiple, could equate to another $500 million in stock value. And MGM's lower cost of borrowing should enable it to cut at least 1 percentage point from Primadonna's interest rate.

Primadonna owns about 590 acres of land in California and Nevada, of which about 140 acres are undeveloped, MGM Grand said. In addition, the company leases 142 acres of land in Nevada from the Primm family.

"That's the best time-share prospect in the world, and a number of time-share guys have been out there and looked at it recently," said Ehlers.

"The combination of Primadonna and MGM Grand affords us the opportunity to take advantage of economies of scale, as well as the diversification of revenues," said MGM Grand Chairman Terry Lanni.

"This is a significant step toward our goal of creating a gaming and entertainment giant," said Alex Yemenidjian, MGM Grand president.

"We believe that the merger is compelling for Primadonna's shareholders," said Primadonna's Gary Primm. "By joining with MGM Grand, Primadonna's shareholders will benefit from MGM Grand's financial strength and exciting growth prospects.

"The exchange represents a premium for Primadonna, based on stock prices for Primadonna and MGM Grand when negotiations commenced," he said.

"We believe the acquisition will be immediately accretive to MGM Grand's earnings, even before taking into effect anticipated cost savings and synergies," said MGM Chief Financial Officer Jim Murren.

Primadonna wasn't the only casino stock to post a sharp gain in stock market trading Friday. Boyd Gaming jumped $1, or 32.7 percent, to $4.0625, on volume eight times heavier than normal.

Boyd executives said they didn't know of any reason for the price rise or volume. But analysts said Boyd might be in the crosshairs of a leveraged buyout firm.

"The question is, does it make sense for Boyd to be public anymore?" said one analyst. "They don't have or need access to capital markets right now, so it's a perfect candidate for an LBO."

Today, Boyd was up another 25 cents, to $4.3125.

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