Dubai buys into Strip

MGM Mirage's $5.1 billion deal to sell half of its CityCenter development and a nearly 10 percent stake in the casino operator to Dubai World, a holding company for the Persian Gulf state, is more than just another joint venture investment.

Company Chairman Terry Lanni believes the transaction, announced early Wednesday, may be the single-most significant event in MGM Mirage's history, eclipsing in importance the $6.4 billion buyout of Mirage Resorts in 2000 and the $7.9 billion purchase of Mandalay Resort Group in 2005.

Lanni said the transaction, in which Dubai World will invest $2.7 billion into CityCenter and $2.4 billion to acquire more than 28 million shares of MGM Mirage stock, brings the company a long-term partner with an interest in enhancing the company.

The deal also gives MGM Mirage access to the relatively untapped market of Dubai, which attracts wealthy visitors from Russia, India and Middle Eastern countries. Lanni said Dubai World would help bring those customers to MGM Mirage resorts on the Strip.

"This is a paradigm event for the company," Lanni said. "(The Mirage and Mandalay acquisitions) were great situations and opportunities to add additional brands and real estate. They also allowed this transaction to take place. Everything they do is long term, with a goal of enhancing the brands."

Dubai World will pick up 50 percent ownership of CityCenter and initially purchase 14.2 million new MGM Mirage shares at $84 a share, a 13 percent premium to Tuesday's $74.32 closing price. Dubai World will also tender an offer to buy an additional 14.2 million shares on the open market for $84 per share. If Dubai World is able to complete the stock purchase, the company would own approximately 9.5 percent of MGM Mirage.

Unlike recently announced private equity investments involving several Las Vegas casino companies, the deal will not add debt to MGM Mirage's balance sheet. Instead, the company will be able to pay down some debt and reduce some of its costs for CityCenter, a $7.4 billion Strip development that includes a 4,000-room hotel-casino, a 470,000-square-foot retail, dining and entertainment complex, 2,650 high-rise residential condominiums and two 400-room nongaming boutique hotels.

"Private equity have short-term arrangements. Dubai World is in for the long-haul," Lanni said.

Wall Street lauded the deal, the latest in a handful of joint-venture partnerships MGM Mirage has forged since last year, including deals for new Strip hotel-casinos and nongaming developments in China and the United Arab Emirates.

Several gaming analysts upped their price targets for MGM Mirage shares to from $100 to $115 a share following the announcement. The company was one of the New York Stock Exchange's most active stocks Wednesday, with almost 8 million shares traded. The announcement sent MGM Mirage up more than 8 percent in initial trading. Shares of the company closed at $80.94, up $6.62, or 8.9 percent.

"This brings MGM Mirage $3.9 billion of cash and a new deep-pocketed, gilt-edged investment partner," KeyBanc Capital Markets gaming analyst Dennis Forst said in a note to investors. "Leverage and risk are lowered, the major cash infusion will allow more flexibility going forward, and the company's list of partners seems to get better and better."

Bear Stearns gaming analyst Joe Greff agreed the partnership could help mine a customer base ahead of the competition.

"Partnering with Dubai World should also help MGM Mirage penetrate international markets in which it currently does not have a presence," Greff said. "In addition, the deal immediately improves the company's balance sheet, as it reduces leverage for other development deals, share buy backs, and or special dividends."

Steven Wieczynski, the gaming analyst for Stifel Nicolaus Capital Markets, said Dubai World gains a lucrative foothold on the Strip.

"For Dubai, this announcement provides them with a major entrance into the commercial gaming arena," Wieczynski said. "Dubai plans on getting gaming licenses in Nevada and New Jersey, which we believe is a clear sign that a larger investment in MGM Mirage is forthcoming."

MGM Mirage executives and officials from Dubai World met with Nevada gaming regulators Tuesday before the deal was announced. Gaming Control Board Chairman Dennis Neilander said the deal would mark the first time a country had applied for a Nevada gaming license.

Lanni said talks with Dubai World began when MGM Mirage negotiated a joint venture in June with Kerzner International Holdings to develop 40 acres of land on the northern end of the Strip across from the Sahara.

Dubai World owns 30 percent of Kerzner and Sultan Bin Sulayem, chairman of Dubai World, came away impressed after a tour of CityCenter, Lanni said.

"In seeking international expansion, we chose a partner who would complement our strengths in large-scale development as well as share our view of investing for the long-term," Sulayem said in a statement.

Lanni put together a meeting in the late spring between Sulayem and MGM Mirage founder and majority shareholder Kirk Kerkorian to discuss the joint venture. Kerkorian, a Los Angeles-based 90-year-old billionaire, has made several moves in the past year to increase the value of MGM Mirage.

In June, Kerkorian's investment arm, Tracinda Corp., abandoned a proposal to buy CityCenter and the Bellagio, which had sent shares of MGM Mirage up more than 20 percent on the news.

Once the deal with Dubai World is complete, Kerkorian's stake is expected to fall to 51.65 percent from 54.15 percent.

MGM Mirage will remain CityCenter's developer and will be paid a management fee of 2 percent of the gross revenues from the hotel-casino and the Vdara condo-hotel. Lanni said the company will receive 5 percent of the operating profits and a flat $3 million annual fee for managing the shopping center, before its 50 percent share of the net profit is determined, Lanni said.

In addition, MGM Mirage is entitled to a $100 million bonus payment from Dubai World if the 76-acre CityCenter project is finished on budget and by the scheduled time of late 2009. More than $2.7 billion of the total construction cost is already expected to be offset by the sale of condo units.