MGM/MIRAGE

CCFA ASSIGNMENT

MGM/MIRAGE MERGER
INTRODUCTION
The casino gaming industry is a favorable market with positive outlook in US especially
because of its demand. It has a huge potential in both destination and local markets. One
may be sensitive to political and economic conditions when it comes to destination
market while the other shows a neutral outlook on recession. Since, main driver is the
cash flow, till it has high demand and volume, it will have high returns. Further, the
industry is fragmented with high barriers to new entrants.

THE DEAL
Usually the acquisitions in this industry have been observed as successful. Although most
of them were driven by debt. The merger occurred on March 7 in the year 2000 for
$6.4bn in cash and debt. MGM paid $21 per share in cash which is 93% more than the
Mirages share price.
BEFORE THE DEAL:
MGM Grand
A BBB- rated casino with a negative outlook with a 66% of total EBITDA in Las Vegas.
For the last three tears, it had a sales of $767mn and total debt/capital ratio of 22.
MIRAGE
A BBB rated casino with stable outlook and 87% of total EBITDA where Las Vegas strip
EBITDA was noted as $487mn. The sales for last three years were $1359mn and
debt/capital ratio of 35. Its shares had fallen approximately 47% because of its failure of
the two new casinos in Las Vegas and Mississippi.
AFTER THE DEAL
Strengths
The merged company would be the largest in Las Vegas and dominate the gambling
industry. It will help MGM to cut costs and reduce operating expenses as marketing
offices will shut down . it is estimated that $4bn sales will be generated and $1bn
EBITDA. It will
By
also reduce its debt
as the cash flows
from non-strategic
assets will be used.
1|PAGE

Weakness

Since Mirage has a negative figure of free operating cash flow/ total debt ratio which is
38, the merged entity might face issues as it will bring down the cash flow after merger.
Also, the casinos are concentrated in Las Vegas or rather mainly US, hence, any changes
in economic and social factors would effect this industry to a great extinct if they are not
favorable.
FACTORS

MGM GRAND

MIRAGE

MERGED

(1 casino)

(1 casino)

sales

$790mn

$571mn

$4bn

EBITDA

$194mn

$136mn

$1bn

Fig. 1

Thus, after looking at all factors, it appears that it has more strengths than weaknesses
and the merged company will come out to be better than the individual entities.
IMPACT ON FINANCIAL MEASURES
In terms of debt

MGM Grand
Inc.

efficiency

profitability

EBITDA/interest

Tot debt/ cap

sales

Tot assets

Asset
(%)utilisatio
n

Pre tax
return

5.6

22

767

1334

57

15

8.7

35

1359

2441

56

16

5.42

46.75

1032

1032

55

13.75

(entire grp)
MIRAGE
Resorts
(entire)
Industry avg

2|PAGE

MERGED
MGM
MIRAGE

Approx. equal to
industry avg with
EBITDA inc.

More than
industry avg
because of debt

Better than
avg and
reduced assets

WHAT WILL RATING AGENCIES DO?

A deep analysis has been done regarding the key financials which affect the rating and
also impact the company. The study shows that there are much more positives than the
negatives to look upon. The basic financials which are known to be EBITDA and sales
are likely to increase after the merger. Hence, the strengths overcome the disadvantages.
To go with this, the agency would prefer with an investment rating of BBB with a
positive outlook for future.
SHOULD THE BANK REDUCE ITS EXPOSURE?

As already discussed, there is a positive outlook and the merged entity would perform
great. The decreasing costs and increasing sales is a powerful impact for the banks to
look upon. Hence, if it is clearly seen that the merged company will do well then there is
no need for the bank to reduce its exposure. This is because of the synergy of the merger
with increasing revenue and dominating the casino industry.
QUESTIONS FOR EXECUTIVE TEAM

(1) For MGM, what effect does this deal have as you are acquiring a casino with negative
ratio of free operating cash flow to debt? Dont you think this will impact negatively on
the shareholders of your company?
(2) For Mirage, why would you want to merge with a company which has a lower rating
than yours?
Also, you have a greater EBITDA than MGM, then what were the main reasons of this?
IMPACT

Presently, the rating assigned is BBB with positive outlook. But if there are changes in
the social and economic norms, this industry will be greatly affected. Also, in many
countries. For eg in India, FDI is not allowed in the gambling sector. Hence, the merged
company may not be able to expand its business beyond certain countries. Thus, risk is
high subject to variation which are unfavorable to this industries and hence a downgrade
notch will be observed in that case. Also, sometimes top executives do not reveal the real
insight about the deal. If Mirage says it is a hostile take over, it may further impact the
share prices. As earlier $17 per share were offered to Mirage which was not acceptable by
their team and management.
3|PAGE

More than
avg. industry

4|PAGE