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MGM Mirage seeks growth, fewer risks

Struggling with an economy that has gouged gambling profits and cut casino companies’ ability to borrow, MGM Mirage hopes to keep expanding its international hotel and casino empire and fattening its profit — but have other companies foot the bill.

Under 10 new deals, the largest owner and operator on the Strip will manage hotels abroad without spending on land or development, part of its overall effort to cut costs and risk. Several of the hotels will carry the names of the company’s famous Bellagio and MGM Grand casinos in Las Vegas.

Most hoteliers use franchising and management contracts to generate revenue at lower risk and cost. But MGM Mirage’s deals to brand and manage hotels built by others are a notable first for the casino operator partly controlled by billionaire investor Kirk Kerkorian. They may be the company’s only option for expansion as it continues to struggle with massive debt, which it reported at $12.36 billion as of June 30.

Major casino companies have typically grown by buying or building properties they also operate, like the $8.5 billion CityCenter project MGM Mirage is building in Las Vegas, which it plans to manage. The 67-acre-project, co-owned by Dubai World, starts opening in December.

“You are not going to see anytime soon these big, massive investments in brick-and-mortars in our industry, at least in the gaming industry,” Gamal Aziz, who leads MGM Mirage Hospitality, the subsidiary in charge of the 10 contracts, told The Associated Press. “So how do you execute on your growth strategy?”

MGM Mirage’s answer is management and franchise deals, which Aziz said the company began considering two years ago. In most cases, the new deals do not include casinos and provide MGM Mirage 2 percent to 3 percent of gross sales plus up to 10 percent more if a property achieves profit goals, Aziz said.

They are an attempt to build revenue rather than grow by adding assets.

MGM Mirage is betting its branded resorts will attract visitors even without gambling, which now produces just more than one-third of MGM Mirage’s revenue. Observers said that isn’t guaranteed.

“If they’re hoping to compete with Four Seasons, that’s a high bar,” said Randy Fine, a former Harrah’s Entertainment Inc. vice president who started and runs the Las Vegas casino marketing and consulting firm Fine Point Group. “That’s not going to be easy.”

Even if MGM Mirage leads all companies in franchising and managing casinos, it will face tough competition from nongambling hotel companies, said Fine, who helped manage four casinos for billionaire Carl Icahn before they were sold. And he said the move won’t likely generate significant revenue, perhaps $4 million per property per year.

“It’s not a bad idea — it’s just not a big idea,” Fine said.

MGM Mirage lost $855 million in 2008, compared with a profit of $1.58 billion in 2007. And business remains slow: It lost $212.6 million during the second quarter of 2009, compared with profit of $113.1 million in the same quarter a year earlier.

Separating the developing, franchising and managing of hotels is common. Starwood Hotels & Resorts Worldwide Inc., for instance, sells its St. Regis, W, Westin and Sheraton brands, among others. Wyndham Hotel Group LLC works similarly, offering franchises including Super 8 Motel, Days Inn, Hawthorn Suites and Travelodge. Both companies sell hotel management services, too.

That means travelers can often stay at a hotel where the company that owns its name doesn’t have a stake in its performance; it just gets paid for use of the brand. Management contractors assume responsibility for performance and are paid by how well they run a property. The property’s owners carry most of the debt and therefore most of the risk, and they keep the bulk of profits.

Starwood owned just 69 hotels as of the end of last year, but its network of 968 properties included 437 franchisees and 436 other hotels managed by Starwood or joint ventures. The company also owned 26 vacation ownership and residential properties.

Starwood said 26 percent of its second-quarter revenue this year came from franchise and management fees, not including reimbursements Starwood received from property owners for costs at those hotels. Just more than half came from hotels it partially or fully owns and those it leases.

Jan Freitag, vice president of global development for Smith Travel Research Inc., said hoteliers are increasingly leaving property ownership to investment trusts, and the terms of MGM Mirage’s deals are similar to those hotel companies reach.

“In that vein, what MGM Mirage is trying to accomplish — to get to a more franchise-driven model — is very much along the lines of what the market is rewarding today,” he said.

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