Despite slowdown, casino giant spending big

By Liz Benston

Monday, May 12, 2008 | 2 a.m.

Even as gamblers, shoppers and diners are clutching to their dollars and Las Vegas reels from the worst economic slowdown since Sept. 11, MGM Mirage is spending billions of dollars on itself.

The spree includes more than $1 billion to buy back company stock, plus another billion on new projects and upgrades.

This comes as MGM Mirage is building its $8 billion-plus CityCenter.

Despite its aggressive spending, MGM Mirage is a Wall Street favorite. Its financial position is strong, with at least $7 billion sitting in the bank — bonds the company raised years ago, before the economy went south, at mostly fixed rates.

Rather than draw upon those funds, MGM Mirage — which has sold $1.7 billion in condos at CityCenter — expects to raise the remaining $3.5 billion it needs to finance the megaproject from major banks that are supposedly eager to work with the company, even as smaller, more leveraged companies can’t get appropriately priced loans at all.

In part because of its relationship with Dubai World, MGM Mirage can assemble financing more easily than other companies.

In the meantime, MGM Mirage has accelerated plans to upgrade rooms at several of its hotels — a seemingly counterintuitive strategy during a business slowdown. The company sees it as akin to a pit stop during a yellow flag in a car race: When the economy returns to full speed, it will be better positioned to make money.

“We see this as an opportunity for us, not only to streamline our business and be more efficient but to spend more money than the competition,” Chief Financial Officer Dan D’Arrigo said Tuesday, the same day MGM Mirage reported a 30 percent dip in first quarter profit.

Even before the slowdown, the company started a cost-cutting campaign, which includes selling more rooms through company-owned Web sites versus sharing revenue with online booking companies and more efficiently managing room inventory.

MGM Mirage has automated some back-office functions, including installing equipment that automatically dispenses uniforms to workers, and is implementing software to rate table game players — technology that can cut costs by reducing freebies for unprofitable players while increasing comps for valuable ones. The company is dropping consulting contracts, trimming travel and advertising budgets and reducing the amount of supplies it has to store in warehouses.

MGM Mirage is “expecting that this is going to be a short and shallow recession,” said Dennis Farrell, a bond analyst with Wachovia Securities, and doesn’t want to lose momentum in maintaining its market position.

The company’s primary competitor, Harrah’s Entertainment, can less afford to reinvest in its properties since the company’s buyout by private equity firms. That deal cost Harrah’s $31 billion, including the purchase of Harrah’s stock, refinancing the company’s debt and other fees related to the transaction.

Harrah’s isn’t being stingy with cash during the slowdown, either. The company is spending more than $1 billion on a new hotel tower at its Caesars Palace flagship and $1.8 billion on three major projects outside of Las Vegas: a Margaritaville-branded resort in Biloxi and expansions at its Harrah’s Atlantic City and Horseshoe Hammond casinos. But these long-planned projects don’t leave much flexibility for the company to spend additional money in Vegas, analysts say.

MGM Mirage “generates free cash flow and has a low cost of debt,” Jefferies & Co. stock analyst Larry Klatzkin said. “That’s a big difference” from Harrah’s, which has a “sizable debt burden at much higher cost.”

There’s another quality to MGM Mirage that’s attractive to Wall Street, even as investors are nervous about Las Vegas’ ability to attract legions of new visitors to help fill more than 30,000 new hotel rooms over the next couple of years.

The company’s decision to buy back stock is a sign that executives are banking on growth potential beyond the gaming assets it owns today, Farrell said.

Through its recently-created hotel management subsidiary, MGM Mirage hopes to accumulate management contracts and license its brand to hotels built by partners. These would include nongaming luxury hotels in places such as Abu Dhabi, Dubai and China, with more to come.

Licensing and management deals can be a lot more profitable than casinos, which cost a great deal of cash to build and maintain, Farrell said.

Last week, MGM Mirage President and Chief Operating Officer Jim Murren predicted the company’s hotel division will “grow into a large company” that will generate significant income with little risk or debt — a characteristic of hotel companies whose shares trade much higher than their casino counterparts, relative to profit.

“We are a capital-intensive business but we think we can outthink our competitors,” he said. “This will be a complement to what we’re doing and will improve and diversify our earnings.”