MGM Mirage To Sell $5 Bil Casino Stake

In a move solidifying its preference for joint venture projects, casino operator MGM Mirage Inc. said Wednesday it would sell off half of its newest megaproject on the Las Vegas Strip, CityCenter, to Dubai World in return for a $5.1 billion investment and the promise of hefty management fees.

The investment from Dubai’s government-owned holding company includes a $2.7 billion equity infusion for the massive CityCenter casino-hotel complex under construction and up to $2.4 billion in purchases of MGM Mirage common stock, half of which would be in newly issued shares.

The investment gives the Dubai company, which is developing luxury resorts on reclaimed land in the Persian Gulf, its first step into Las Vegas and takes a significant debt load off of MGM Mirage’s books for developing the $7.4 billion CityCenter.

It also allows MGM Mirage to access Dubai World’s rolodex of wealthy clients that could purchase luxury condo units at the site at the heart of the Strip, said MGM Mirage chief executive Terry Lanni.

“The great advantage with Dubai World is they are selling villas and condos to people we don’t even know. They’re selling condominiums for four times per square foot than we are,” Lanni said. “We just see all kinds of synergies here.”

The deal also caps a series of moves by MGM Mirage’s majority shareholder, 90-year-old billionaire investor Kirk Kerkorian, to boost wealth in the company he built.

In June, Kerkorian’s investment arm, Tracinda Corp., abandoned a proposal to buy CityCenter and the upscale Bellagio casino-hotel next door after shares jumped on the news and MGM Mirage cut a separate joint venture deal with Kerzner International Holdings Inc. to develop 40 acres of land on the Strip south of Sahara Avenue.

Along with its 50 percent stake in the CityCenter joint venture, Dubai World agreed to tender an offer for 14.2 million outstanding MGM Mirage shares at $84 per share, a 13 percent premium to the closing price of $74.32 on Tuesday. It would also buy an additional 14.2 million in newly issued shares at the same price, giving it an approximately 9.5 percent stake.

Kerkorian’s stake is expected to fall to 51.65 percent from 54.15 percent.

Shares jumped Wednesday by 7.5 percent, or $5.57, to $79.89.

“(Kerkorian) was confident that with MGM’s extensive land bank, which includes substantial land on both the Las Vegas Strip and Atlantic City, coupled with management abilities to extract values from joint venture deals, there was value to be unlocked in the company,” said Susquehanna Financial group analyst Robert LaFleur in a research note. “This deal is a clear testament to that point of view.”

Lanni said the deal would allow MGM Mirage to reduce its debt by about $6 billion. Instead of using cash flows and credit lines to pay for construction, the company will seek out project financing through the joint venture, taking the load off the company books.

Dubai World also has an excellent credit rating and owns a significant share in several banks, allowing the partners to avoid turmoil in the credit markets, Lanni said.

“I suspect that with their A-minus credit rating, we should be able to borrow at a very significant, positive interest rate,” he said.

MGM Mirage will remain CityCenter’s developer and will be paid a management fee of two percent of gross revenues from the hotel-casino and the Vdara condo-hotel. It will also claim five percent of 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 CityCenter project on 76 acres of prime Strip real estate is finished on budget and by the scheduled time of late 2009. More than $2.7 billion of the total $7.4 billion construction cost is already expected to be offset by the sale of condo units.

Dubai World made headlines last year when its subsidiary, Dubai Ports World, was forced to sell its U.S. port operations after an uproar in Congress over security concerns.

Dubai World this month signed an agreement for control of the Barneys New York department store. A division of Dubai World spent $100 million this year to buy the QE2, the majestic ocean liner that has carried millions of people across the Atlantic during its 40-year history.

The company plans to turn the giant passenger ship into a first-class floating hotel, retail and entertainment destination, berthed off Dubai’s manmade Palm Jumeirah island.

The joint venture with MGM Mirage is expected to close by the end of the year.