| Fitch Comment: MGM-MIRAGE-Mandalay Merger Update |
March 28, 2005--MGM MIRAGE (MGG) and Mandalay Resort Group (Mandalay) recently announced an extension of the closing date on MGG's acquisition of Mandalay to June 30, 2005, pending approvals from Illinois and Michigan. The companies also announced an agreement to sell Mandalay's 53.5% stake in MotorCity Casino in Detroit for $525 million (6.8 times (x) trailing and 7.5x forward 12-month EBITDA multiples) to an affiliate of Marian Illitch, who already owns a 25% interest in the casino. Proceeds are at the low end of expectations, which Fitch estimated at anywhere from $450 million to $800 million. The sale is expected to close immediately prior to the closing of MGG's acquisition of Mandalay. Fitch is not surprised by the delay, and noted in a press released dated Jan. 25, 2005 that issues in Detroit might delay closing. Fitch does not believe the delay presents a risk in ultimate closing of the transaction, but the timeline for deleveraging will be pushed out slightly.
Credit Implications
The announced sale removes the uncertainty surrounding the level of asset proceeds that will go toward offsetting the Mandalay purchase. The sale is at the low end of Fitch's previous assumptions of between $450 million to $800 million in proceeds for the MotorCity interest. Assuming $525 million in sale proceeds, total leverage is expected to be above 6x at closing versus standalone fiscal year-end 2004 leverage of 4.1x. Projected senior leverage is high at 4.8x versus standalone fiscal year-end 2004 senior leverage of 3.2x. Nonetheless, Fitch expects the combined entity to benefit from strong free cash flow (estimated at $700 million annually) and aggressive debt reduction post-closing. Capital spending is expected to be relatively low at $550 million in each of 2005 and 2006, as much of the planned spending (such as Project City Center) will begin in the 2007 timeframe. Based on these assumptions, Fitch now estimates that MGG could deleverage to 5.6x by fiscal year-end 2005, and 5.1x by fiscal year-end 2006. This scenario could result in at least a one-notch downgrade at the various levels of debt. Widening of the rating differential between the senior and subordinated debt is a possibility given the significant increase in senior debt.
Detroit Sale Multiple
MGG was forced to negotiate the sale of one of two licenses in Detroit (to comply with local ordinances restricting ownership to one license in Michigan). Fitch believes both properties had complicating factors that hindered potential valuation. The pool of MotorCity buyers was limited by reluctance on the part of investors to inherit MotorCity's various partnership interests (including a large consortium of local owners). Meanwhile, the MGM Grand property has the overhang of an ongoing legal dispute with the Lac Vieux Tribe (which MotorCity and Greektown casinos settled last year for $79 million) regarding the initial gaming license selection process. This issue also creates uncertainty for all licensees in the market with respect to the risk and likelihood of a material investment in a permanent facility, as a federal court order currently precludes construction of a permanent facility until a settlement is reached. An additional factor that may have had an impact on valuation is the recent gaming tax increase, which could have reduced confidence in Michigan as a casino-friendly, stable regulatory environment. Most important, Fitch believes that MGG's self-imposed merger closing deadlines put Marion Illitch, already a licensed minority partner in MotorCity, in an advantaged position to negotiate a favorable sale price with the company.
What Remains to Be Done?
With Federal Trade Commission (FTC) clearance in February and approvals from Nevada shortly thereafter, only state approvals from Michigan and Illinois are still pending. In Illinois, plans to put the Grand Victoria in escrow until after closing have been dropped now that a full board is in place to preside over the proposed merger. Review by the state is now expected to take several weeks. Fitch does not foresee any potential obstacles to the sale being approved in Illinois, unless the licensing process for MGG is extended. In Michigan, the proposed sale removes a potential obstacle in the approval process, as ownership of more than one license is prohibited. Acquisition by an existing license-holder should greatly expedite the process. The issue will likely be considered in the next scheduled Michigan Gaming Board meeting on April 12.
Source: BUSINESS WIRE
Wednesday, 30 March 2005
Copyright 2002-2008 © All rights reserved. • Casino Domain
|
|
|
