GAMING ROOTS, NONGAMING AMBITIONS

By Liz Benston

Sunday, Sept. 9, 2007 | 1:24 a.m.

When MGM Mirage in 2004 said it would build CityCenter, a resort complex with multiple hotel and condominium towers, it was announcing more than just the country's most expensive privately funded project and one that would change the paradigm for future resorts along the Strip.

The company embarked on an identity makeover of epic proportions.

Led in part by Jim Murren, the company's president and chief financial officer and a Wall Street analyst-turned casino executive with an outsider's perspective on the business, MGM Mirage initiated discussions and struck deals designed to change investor perception of casino companies as overly regulated monoliths tied to the risks and rewards of the gambling pit.

MGM Mirage - with its vast land holdings along the Strip and forward-thinking management team - was reaching to become something even bigger than a next-generation Four Seasons, an iconic brand with a global presence and five-star reputation. It wanted to grow into a multinational hospitality giant touching the world's wealth centers.

But ironically, the Strip casinos that made the company rich are the very entities that could hamper the company's growth in such places as the Middle East - a region as yet untouched by gam ing companies.

Even in the United Arab Emirates, an entrepreneurial region that has welcomed investment by American multinationals such as Microsoft and IBM , casinos are not only illegal but believed to be a major sin under Islamic law.

So it seemed far-fetched, even alien to the goals of MGM Mirage, when it agreed to sell a half-interest in CityCenter for $5.1 billion to Dubai World, a conglomerate owned by the Persian Gulf state.

In fact, the deal is the latest and most significant example of the company's long-term identity makeover at work.

In the Dubai World joint venture, MGM Mirage will contribute its investment in CityCenter and Dubai World will contribute $2.7 billion in cash, plus an additional $2.4 billion to acquire as many as 28.4 million shares of MGM Mirage stock.

Understanding this deal and what precipitated it is key to deciphering the company's aspirations.

MGM Mirage was one of the first companies to emphasize the intrinsic value of undeveloped land holdings that were previously viewed as a drag on gaming company balance sheets. The company's stock deserves credit for MGM Mirage's owning more than 200 acres of underdeveloped land along a rapidly changing corridor of luxury development that will one day rival Fifth Avenue, executives said.

Then the company struck the first of several anticipated deals to develop some of that Strip land - a joint venture with luxury resort operator Kerzner International to build a multi billion-dollar resort on the southwest corner of Sahara Avenue and Las Vegas Boulevard. It is the kind of deal that will extract profit from hidden corporate assets (including little-used land behind MGM Mirage's Circus Circus casino) more quickly than previously envisioned by partnering with deep - pocket investors and using land to finance lower-cost deals.

MGM Mirage also began talking up its nongaming profit on the Strip. The company's hotel rooms, nightclubs, restaurants and retail stores are chalking up unprecedented profits and accounting for more than 60 percent of the company's revenue. Executives say the company's success in the nongaming arena allows it to better capitalize on Las Vegas' increasing appeal as a resort destination for the wider audience of people who don't gamble.

Acting on that nongaming theme, the company signed deals with two foreign entities - Mubadala Development Co. of Abu Dhabi and the Diaoyutai State Guesthouse in Beijing - to manage nongaming hotels in places such as China, India, Asia and Europe.

A third deal with the tribal-owned Foxwoods casino in Connecticut would develop and manage MGM-brand hotels across the United States - including nongaming properties - with Foxwoods as an equity investor.

More recently, the company's major shareholder upped the ante - and put a global spotlight on CityCenter - by making a surprise offer to acquire the project, along with the company's top-earning casino, Bellagio.

The offer from billionaire deal-maker Kirk Kerkorian, who later withdrew it, helped boost MGM Mirage's stock price and triggered further interest from potential partners looking at CityCenter as a way to tap into the future gold mine of Las Vegas tourism.

"CityCenter has become a calling card for future development," Murren said. "It's attracted interest from a lot of people outside of the gaming industry and has opened a lot of doors that might not have opened before."

The CityCenter concept of primarily selling condos and renting rooms, besides being just another way to make money, helps MGM Mirage burnish its image as more than a casino company.

At most, the casino will account for about 300,000 square feet of CityCenter's 18 million - square-foot, eight-building, city-within-a-city.

That's one of the reasons why the project, with its relative lack of casino gambling, appealed to Dubai World.

The level of global interest in CityCenter was unexpected, Murren said, and got executives thinking about how to leverage that interest elsewhere.

"We concluded that we shouldn't limit ourselves to new construction and we might want to look at existing resorts as joint venture candidates. The economics of joint venturing a project like CityCenter is extraordinarily positive. The amount of interest (payments) I save more than offsets the amount of cash flow I'm selling off. It puts us in a unique position to diversify our cash flows."

With the U.S. bond market in turmoil, attracting private investors to help finance projects was becoming necessary for big projects. Landing a deep-pocket Arab investor was a surprising move that's been applauded by Wall Street.

There are bigger plans afoot at MGM Mirage to position the company for further partnerships with conservative partners unaccustomed to or uncomfortable with the gam ing business.

As a first step, the company in May created a resort subsidiary to focus on developing joint ventures and nongaming properties.

Unrelated to the Dubai announcement, MGM Mirage initiated management changes that will rid the company of its MGM and Mirage casino subsidiaries. A relic of MGM Grand's acquisition of Mirage Resorts in 2000, the subsidiaries allowed the Mirage properties to be run by consistent management teams and to preserve some sense of the separate cultures the companies had acquired over the years. Consolidating casino operations allows the company to take the next step of building a second unit - or even spinning off a company - that would develop and manage nongaming hotels, as well as a third unit to engage in joint venture projects of the CityCenter variety.

Although MGM Mirage is moving more in the direction of a hotel management company, the company will remain a gaming giant.

Individual hotel contracts around the world are likely to contribute little revenue to the company's bottom line relative to its Las Vegas Strip resorts, which are driven by the draw of gambling even if nongaming amenities account for much of their revenue, analysts say.

But MGM Mirage executives have an interest in talking up the hotel angle for the purpose of branding the company to potential investors.

It's hard for casino bosses not to be somewhat jealous of Four Seasons, the luxury hotel chain that sold this year to a group of investors at a multiple of profit well above that of any gaming company.

For all its wealth, the casino industry still harbors negative associations for investors, such as its high tax rate and heavy, uncertain regulatory environment.

With industry consolidation, more experienced management and better returns for luxury projects, the gap in valuation between hotel and casino companies is narrowing.

In the meantime, expect MGM Mirage to talk about how much the company is moving toward more of a Four Seasons management model and further from its roots at the massive MGM Grand casino.