MGM Mirage goes far and wide

MGM Mirage is taking an all-inclusive approach to expansion.

In the past 12 months the Las Vegas-based casino corporation has signed agreements with a varied range of joint-venture partners -- from startup casino operators to foreign governments. The efforts serve two purposes: spreading the company's brand and influence into new regions and enhancing the value of MGM Mirage's vast Southern Nevada real estate holdings.

The investments include a combination of worldwide nongaming hotels, luxury high-rise residential, casino investments and land development deals.

"When you have land that is always appreciating in value, joint-venture partners become a wonderful way of continuing to increase the value of that land," MGM Mirage Chairman Terry Lanni said. "They also give us a way to move into different markets and expose potential new customers to our products."

The transactions are spreading MGM Mirage's investment capital out well beyond 2010 and is helping to transform the company from just a pure casino operator, gaming analysts said.

The company has taken on joint venture partners to help produce high-rise residential developments in Las Vegas on land that once housed an amusement park at the MGM Grand and as part of the $7.4 billion CityCenter. Joint-venture deals have helped MGM Mirage also plan an entry into the nongaming boutique luxury hotel business in China, the Middle East and at CityCenter.

"Recent results demonstrate what should have been obvious to (Wall) Street over the last few years, the fact that MGM Mirage is becoming much more of a story based on nongaming factors," Prudential Equity Group gaming analyst Joel Simkins said in a note to investors. "While MGM has a very impressive pipeline on a number of fronts we remain concerned that so many irons in the fire could be distracting."

MGM Mirage is considered the world's second-largest casino operator behind Harrah's Entertainment. In Las Vegas, however, the company is the dominant market leader, operating 10 well-recognized Strip casinos, including Bellagio, The Mirage, MGM Grand, Treasure Island, Monte Carlo and Mandalay Bay.

Analysts said the joint ventures are allowing MGM Mirage to find revenue outside gambling.

Jefferies & Co. gaming analyst Larry Klatzkin said MGM Mirage's assortment of joint-venture deals is converting the casino operator into a corporation that stretches beyond the gaming industry.

"We continue to see MGM Mirage as one of the top gaming operators with a strong future ahead of itself," Klatzkin said in an investors note. "Longer term, we see MGM Mirage becoming MGM Holdings or MGM Resorts, with three operating companies, each with their own multiples and analysis."

MGM Mirage expects its joint-venture business to keep growing. Lanni said the company is approached constantly with different investment opportunities. At the same time, MGM Mirage is looking at ways to expand its reach.

"The interest of third parties is really focused on Las Vegas. Companies want to find a way into Las Vegas," Lanni said, using the Hong Kong-based Mandarin Oriental as an example. The luxury boutique hotel operator is building a 400-room hotel with 227 residences at CityCenter.

Lanni and MGM Mirage President Jim Murren have said joint-venture partners could end up handling much of the development and planning for the 78-acre development parcel the company has accumulated on the Strip's far northern end.

The site could follow the same model as CityCenter -- a large hotel-casino along with nongaming boutique hotels, high-rise residences and an entertainment, shopping and dining district -- but with increased joint-venture participation.

"Ideally, we would put up the land and a joint-venture partner would come in help fund the development. We would want to manage the entity," Lanni said. "The joint ventures are a way of bringing new brands to Las Vegas."

MGM Mirage is reversing this approach to bring its brand into new and potentially lucrative markets such as China and Middle East. Agreements signed this year with the Diaoyutai State Guesthouse in China and the Mubadala Development Company of Abu Dhabi, United Arab Emirates, will allow MGM Mirage to partner in nongaming luxury hotels and resorts. The company is expected to offer its brand name in the deals in return for development and management fees.

Also in China, MGM Mirage has its largest joint venture to date, a 50-50 partnership with Chinese businesswoman Pansy Ho in the $1.1 billion MGM Grand Macau. The hotel-casino is under construction and expected open by the end of the year. In February, MGM Mirage said it was exploring sites on the Cotai Strip for a second hotel-casino under the joint-venture agreement.

MGM Mirage's agreement with Diaoyutai State House, in which nongaming hotels could sprout up in some of China's largest cities, might open new avenues for attracting potential customers to the MGM Grand Macau.

"There is a tremendous amount of wealth in the People's Republic of China that is growing every day," Lanni said. "We're the third operator into the Macau market (after Las Vegas Sands Corp. and Wynn Resorts), but introducing our brand (MGM Grand) into some of China's largest cities helps alleviate that disadvantage and gives us much more exposure to Chinese customers. We get a leg up in introducing ourselves to the Chinese looking to travel to Macau."

Nollenberger Capital gaming analyst Justin Sebastiano said the cross-market opportunities in the Middle East and China could pay dividends for the company's casinos in Las Vegas.

"These deals allow MGM Mirage entry in markets with some of the wealthiest and most powerful people in the world," Sebastiano said.

MGM Mirage entered into a similar deal last year with the Mashanantucket Pequot Indian Tribe in Connecticut, operators of the Foxwoods Casino. The tribe is using the MGM Grand name on a $700 million, 824-room hotel-casino being built next to Foxwoods, which is expected to open in 2008. MGM Mirage was paid consulting fees by the tribe to help develop the MGM Grand at Foxwoods.

Analysts expect the gaming company to receive up to $20 million in annual development and licensing fees. But the real advantage is giving MGM Mirage a potential customer base should the company go through with plans to build a large hotel-casino project on 71 acres it owns in Atlantic City.

"In addition to the relatively low cost of generating these cash flows, MGM Mirage will be able to cross-market its properties to the Foxwoods customer base, the majority of which live in the northeastern United States," Sebastiano said. "This is particularly advantageous given that MGM has stated on multiple occasions its desire to build a CityCenter East on the developable land the company owns in Atlantic City."

MGM Mirage has also found joint-venture opportunities in Southern Nevada.

The company has a 50-50 agreement with two Las Vegas developers on 166 acres the company owns in Jean. The partnership plans to build mixed-use retail and affordable housing on the land, valued at $150 million. MGM Mirage said it would expand and possibly replace the company-owned Gold Strike casino in Jean as part of the development.

Last month, MGM Mirage said it would finance part of the proposed $700 million M Resort, planned for the far southern end of Las Vegas Boulevard, through a $160 million subordinated convertible note.