|By Rod Smith, Las Vegas Review-Journal|
Knight Ridder/Tribune Business News
June 16, 2004 - After a seven-hour meeting behind closed doors, Mandalay Resort Group's board of directors late Tuesday gave a thumbs up to MGM Mirage's $7.9 billion buyout proposal, an MGM Mirage executive said late Tuesday.
MGM Mirage's board had met earlier in the day and approved a definitive agreement that would create the largest gaming company in the world with combined revenues of nearly $7 billion a year.
Mandalay's board completed what many observers thought would be a routine vote, agreeing about 9:30 p.m. to move ahead with the merger.
MGM Mirage President Jim Murren said neither side encountered any snags or changed the $71 a share buyout offer that was announced Monday. The deal is expected to close by the end of the first quarter next year.
Murren said the deal was important because his company has evolved dramatically over the past 20 years into a multifaceted entertainment company that has a great future in Las Vegas.
"This transaction will complement what we already have and let us expand our offerings. It also creates a financially even sounder company," he said.
Murren said negotiations were friendly but intense, and he praised the board and management of Mandalay for working very hard on behalf of their shareholders and employees.
Mandalay President Glenn Schaeffer was unavailable for comment late Tuesday night.
Murren said the next step is for the two companies to submit appropriate applications to federal and state regulators for approval.
"There's a lot of work ahead," he said. "The good news is we've done this before, and we've done it well. We know what to do."
MGM Mirage on Monday raised its original offer to $71 per share, $4.8 billion, plus the assumption of $2.5 billion in debt and $600 million in convertible debt.
It had offered to pay $7.65 billion, $68 a share, but Mandalay rejected the original unsolicited bid Friday after MGM Mirage added a last-minute cancellation fee provision that Schaeffer called unacceptable.
Wall Street sources said negotiators agreed to change the breakup fee provision to let MGM Mirage collect $160 million in the unlikely event other potential buyers come forward and Mandalay opts out of the deal.
MGM Mirage stock closed Tuesday at $49.50, up $1.30, or 2.7 percent, on 2.1 million shares, double normal trading volume. Analysts said the stock went up more rapidly than it has been because investors were anticipating favorable board action on the buyout.
Mandalay closed at $67.88, up 28 cents, or 0.4 percent, on 3.7 million shares traded, 50 percent above normal trading volume.
Despite concerns about the effect the proposed merger would have on the combined company's pricing power, a former Bush administration antitrust official said the deal should get done if MGM Mirage and majority owner Kirk Kerkorian want to consummate the merger.
But Mike Cowie, a former litigation counsel for the Federal Trade Commission, said the deal, which would create a gaming goliath that would operate some 30 casinos worldwide and own some of the most popular resorts on the Strip, would cause a thorough investigation that probably will delay the deal for up to 10 months.
Cowie, a partner in the Washington, D.C.-based Howrey Simon Arnold & White law firm, which specializes in antitrust and international law, said the deal could be tough to defend because the FTC is likely to define the merged company's market narrowly.
But he speculated the deal will close because the two companies own "divisible properties" that would be easy to sell if needed.
"The only question is whether assets need to be divested. It could still fall apart for business reasons -- for example if Kerkorian really wants the Mandalay Convention Center and regulators order its divestiture -- but there should be ways to do the deal," he said.
The key question for the FTC will be how it defines the market for MGM Mirage and Mandalay and whether the companies now compete for customers with other tourist and gaming jurisdictions or just for those customers who come to Las Vegas.
Cowie said recent FTC rulings on similar issues suggest the agency will define the market narrowly, which will cause what is called a second-phase investigation, the most serious review possible.
Wall Street analysts said if the agency defines the companies' competitive market as just being Las Vegas, it would raise particular concerns because the proposed merger would exceed federal guidelines under the Herfindahl-Hirschman Index, a weighted index that measures an industry's market concentration.
Currently, the index ranks Las Vegas's gaming market as moderately concentrated, data prepared by a New York-based research service showed. But with the merger, Leverage World said, the city's market would rise to a highly concentrated, or monopolistic, level.
Cowie said the FTC will be much more concerned with a review of internal pricing documents to determine whether the companies set room and convention prices based on an expectation they are competing for business nationally or only among other hotel-casino operators on the Strip.
Antitrust concerns probably will be an issue for the Nevada Gaming Control Board, further delaying a deal, because state regulators will not act on the case until the deal has a green light from the FTC, board Chairman Dennis Neilander said.
He said the proposed merger might take longer than usual because the regulators have never reviewed a major merger under the state's new antitrust regulations.
Neilander said that Nevada has no numerical guidelines and has eschewed setting any and that it too is concerned mainly with companies' pricing power.
Cowie said MGM Mirage and Mandalay probably will argue that they compete in a national marketplace, with customers being snagged with bargain prices by casinos from Atlantic City to tribal lands in California.
But the two Las Vegas-based companies have argued that Las Vegas is a unique market that insulates Strip casinos from out-of-state competition and national trends that affect business, and Cowie said the FTC will investigate internal documents to determine which basis MGM Mirage and Mandalay use in pricing their rooms and convention space.
He said Royal Caribbean Cruises and Carnival Corp. made a similar argument in their merger fight last year, and the FTC defined the cruise business very narrowly.
But after 10 months, the FTC said enough competition existed from other cruise operators to allow the merger to proceed without divestitures.
Cowie said that though the deal was approved, it suggested the FTC will take its time to review the Mandalay buyout closely and could require the combined company to sell off specific hotel-casinos, based either on geographic areas or on market segments.
It could require the company to sell Bellagio or Mandalay Bay if it decides the combined company has too much pricing power among high-end resorts, or the FTC could require the sale of the Mandalay Convention Center if the agency decides a combined company would control too much convention space.
The antitrust situation creates a conundrum for Nevada regulators who have tried to avoid setting numerical guidelines.
If state regulators raise antitrust issues with the buyout, MGM Mirage is expected to offer to sell whatever properties are required, but it will want regulators to establish specific ratios it must meet in terms of the number of rooms, tables and slots.
Under the Nevada antitrust regulations, no relevant case history exists for requiring a merged company to sell off particular properties.
Sources said Michigan is the only area where regulators probably would force the emerging company to sell one of the properties the companies own.
Each company operates a casino in Detroit, which has issued three gaming licenses to operators. Mandalay has a 53.5 percent stake in the MotorCity Casino, and MGM Mirage has a temporary operation in downtown Detroit and is planning to replace it with a $575 million casino.
Regulators in other states including Illinois, Mississippi and New Jersey would have to review the deal, but analysts said they are unlikely to raise objections.
And if they do, the sources agreed that a merged company probably would dump any property that concerned state regulators.
Sources said regulators in those states, like their counterparts in Nevada, either lack the authority to require the companies to sell off particular properties or have no relevant precedent for doing so.
CONCENTRATION INDEX WOULD SOAR
One tool federal regulators may use to examine a proposed MGM Mirage-Mandalay Resort Group merger is the Herfindahl-Hirschman Index.
HHI, a commonly accepted measure of market concentration, is calculated by squaring the market share of each company competing in a market and then adding the numbers, according to the Web site Investopedia.com.
If, for example, only one company represented an industry, then that company would have a 100 percent market share and the HHI would be equal to 10,000, indicating a complete monopoly.
If thousands of companies were competing in a market, each competitor would have nearly 0 percent market share, and the HHI would be closer to zero, indicating nearly perfect competition.
The HHI can range from a minimum close to zero to a maximum of 10,000.
The Federal Trade Commission considers an index under 1,000 to reflect real competition, an index between 1,000 and 1,800 to reflect a moderately concentrated market and an index of more than 1,800 to reflect a highly concentrated, monopolistic, market.
Mergers that increase the HHI by more than 100 points in concentrated markets raise antitrust concerns and are examined more closely by the FTC.
The HHI for the Las Vegas gaming market without the MGM Mirage-Mandalay merger is 1,497, but with the merger, the HHI would rise almost 1,000 points to 2,480, data prepared by Leverage World, a New York-based research service, showed.
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