June 13, 2004 - Mandalay Resort Group may be saying no to a marriage with MGM Mirage, but industry insiders, analysts and experts still see some merits to a union between the two gaming giants.

Despite some doubting Thomases, most of the gaming experts last week said the proposed $7.65 billion merger, which Mandalay rejected Friday afternoon, could have a tidal effect on Las Vegas gaming that would lift all boats forever rather than just a ripple effect that would shake up the industry.

Deutsche Bank analyst Andrew Zarnett said a MGM Mirage-Mandalay merger would have a very positive impact, especially on major players. The market would end up being much more like an oligopoly, he said, dominated by a few giants with greater control over hotel room supply and increased room-pricing power.

"That should benefit Caesars (Entertainment) as well as Harrah's (Entertainment) and quite frankly all participants in the market," Zarnett said.

Harrah's Entertainment boss Gary Loveman and Station Casinos finance chief Glenn Christiansen agreed with Zarnett. They told analysts in New York last week a merger between MGM Mirage and Mandalay would benefit major operators individually and the gaming market in Las Vegas generally.

They said a buyout, if one does goes through, would eliminate some of the irrational marketing that goes on in Las Vegas, such as deep discounting of room rates on the Internet.

Having fewer competitors, the executives said, will help the remaining companies, including theirs and Caesars, better manage room rates and increase profitability.

Loveman cited Atlantic City as a good example of a market where consolidation has led to more stabilization and growth.

Caesars' bosses declined to comment. But University of Nevada, Las Vegas professor and casino industry expert Bill Thompson said it is simply easier for three companies to deal with pricing issues than it is for four. He also said MGM Mirage, Caesars and Harrah's would be in stronger positions to establish "pricing uniformity."

He warned, however, that although the added pricing power might be good for the industry giants in the short run, it may not necessarily be good for consumers or for Las Vegas in the long run.

"If all this does is add $10 to the price of a room everywhere in Las Vegas, it'll hurt in terms of visitors already coming here, what they spend and attracting new visitors," Thompson said. "Las Vegas still beckons people partly as a bargain. Remember, you can still get good rooms for less than you can at a Super 8 in Idaho."

He added a merger would also create buying opportunities if a combined MGM Mirage-Mandalay was forced to sell off a casino in Detroit -- where Mandalay and MGM Mirage operate two out of the three local casinos -- or individual Strip properties that the two Las Vegas-based companies now own.

Thompson said that Caesars and Harrah's, because of their size, would be in the strongest positions to acquire any prime properties MGM Mirage elected to or was forced to sell after a merger.

Speculation has focused on the chance that MGM Mirage would want to sell Circus Circus and New York-New York because they may not fit the company's upscale marketing plans.

"Either of them would fit nicely with Harrah's whole middle-class marketing mission," Thompson said.

In an advisory to investors last week, Goldman Sachs analyst Steve Kent said that, based on the operators' remarks at meetings in New York, it sounded as if MGM Mirage officials were fed up with the uncertain regulatory, competitive and tax environment in regional markets. Kent said it also seemed the executives would be interested in expanding in Las Vegas because it has a more hospitable environment for gaming businesses.

Zarnett said a merger would positively affect midlevel players such as Aztar Corp., which owns the Tropicana, and Boyd Gaming Corp., which owns the Stardust, because it would bring more gamblers to Las Vegas, many of whom will still shop for bargains. Also, he noted, the merger could increase the value of real estate on the Strip.

Finally, Zarnett said a merger might have the biggest effect on niche operators such as the Palms, Terrible Herbst Casinos and the Hard Rock Hotel.

He said niche casinos have been proving more profitable than major operators. And, he added, the increased property that could become available if a larger MGM Mirage divests itself of properties such as Circus Circus and New York-New York, could both entice current niche operators to expand and encourage new entrepreneurs to enter the market.

Palms owner George Maloof expressed reservations that a merger would significantly affect the operation of his hotel-casino on Flamingo Road. But he agreed it could open real estate possibilities he'd want to seriously consider as expansion opportunities.

Zarnett insisted that new visitors lured by a combined MGM Mirage-Mandalay would add to the customer base of players looking for "hip" experiences, including those who might try the Palms. But added that the profitability of these niche operators would convince entrepreneurs there is room to develop creative niches that reap tremendous returns.

He cited Terrible's, which he said threw off $59.8 million in cash flow in the 12 months ended March 30.

A top industry source, who asked not to be named, said a merger would likely have little effect on consumers at high-end properties such as Caesars, MGM Mirage and the forthcoming Wynn Las Vegas. But, the source said, the marketing power of a combined MGM Mirage-Mandalay company should be able to drive added customers into midlevel resorts, some of which have not yet even been developed.

For the third-tier convention market, a merger might have the most positive immediate impact, the source said, because of the power MGM Mirage would have by combining the two companies' meeting space with the broadest range of amenities.

The greatest opportunities would open up at the lowest end of the market because of the divestitures that likely would take place, he said.

University of Nevada, Las Vegas History Department Chairman Hal Rothman said the companies and individuals with the most to gain from a merger own land around Wynn Las Vegas and Fashion Show mall, citing the New Frontier, Stardust, Riviera, Wet 'n Wild and the Sahara.

"The redevelopment (of the north end of the Strip) was going to happen. This is going to accelerate it," Rothman said before Mandalay's rejection of the $68 per share buyout offer. "Wynn Las Vegas by itself may not have been enough to do it, but the merger will kick off a redevelopment storm there."

But Rothman, a student of the ups and downs of Las Vegas history, called the merger proposal a mixed blessing.

"Las Vegas has always been at its best when it has had a creative wizard to follow, a brilliant entrepreneur. It used to be (Steve) Wynn and lately it's been (Mandalay President) Glenn Schaeffer. But corporate ownership (like MGM Mirage) doesn't lend itself to that at all," Rothman said.

He said Schaeffer has been brilliant at appealing to the MTV and youth culture to lure customers to Mandalay Bay and Luxor.

Rothman said the imagination and energy it takes to conceive of and execute new strategies may get drowned in the corporate bureaucracies that emerge in behemoth businesses.

"Karl Marx wasn't right about much, but he was right that capitalism would continue to merge until it becomes one. This is the direction Las Vegas is taking (if the MGM Mirage-Mandalay goes through)," he said.

WHO WOULD BENEFIT FROM THE MERGER:

HARRAH'S ENTERTAINMENT: A deal could increase pricing power at Harrah's Las Vegas and the Rio and create opportunities for expansion in Las Vegas and Atlantic City.

BOYD GAMING CORP.: A deal could boost visitor demand, real estate values and increase chances for redeveloping the Stardust area. It also could create chances for taking total control of Borgata in Atlantic City.

TROPICANA:

A deal could add value to properties on the Strip and raise interest from prospective buyers.

CAESARS ENTERTAINMENT: A deal could leverage pricing power at Caesars Palace, Paris Las Vegas, Bally's and the Flamingo.

TERRIBLE HERBST AND HARD ROCK HOTEL: A deal could create opportunities for niche hotel-casino companies such as the Hard Rock Hotel, Terrible Herbst and the Palms to expand their operations.

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