Slumping MGM Mirage Could Get a Boost from Major Stakeholders

By Jennifer Yousfi

A slowing U.S. economy has taken its toll on MGM Mirage (MGM), but analysts are convinced that majority shareholder Kirk Kerkorian will take action before allowing shares to get too low.

Kerkorian, a 90-year-old billionaire investor, owns 52% of MGM and in the past, has stepped in with a share repurchase plan and repayment of debt to prop up falling share prices. In the past 18 months, Kerkorian has boosted the share price four times using these methods.

Joseph Kath, a fund manager at Baltimore-based T. Rowe Price Group Inc. (TROW), told Bloomberg News that Dubai World could also purchase shares or make an investment to pay down debt and reduce MGM’s interest expense. State-controlled Dubai World already owns a 9.2% stake in MGM and would be willing to invest up to a 20% stake.

As recently as January, Dubai and MGM made a combined tender offer to buy 10 million shares at a price of $75 to $80. The offer boosted the stock over 5%.

"They said they would buy at $80; why wouldn’t they be buying at $48, $49?" said Fath. T. Rowe is MGM’s eighth-biggest shareholder and increased its stake by almost 13% in the fourth quarter, Bloomberg reported.

MGM stock has declined almost 40% year-to-date and the company recently announced 400 job cuts as part of an ongoing corporate restructuring.

"I don’t want to minimize the fact that the economy has affected MGM," MGM Mirage President and Chief Operating Officer Jim Murren told The Las Vegas Sun. "We’d prefer to have the economy we had in ‘07 and ‘05."

Murren went on to say that the majority of the cuts represented an elimination of redundancies left over from the integration of MGM Grand Resorts and Mirage Resorts, which had previously been run as two separate entities.

As the largest casino company in Vegas, MGM Grand has been affected by the decline in room rates and dwindling tourist traffic. But Murren was quick to reassure investors during an April 9 interview with Bloomberg.

Murren said it’s unlikely MGM "is going to sit back and wring its hands hoping that something gets better sometime and we pull out of this recession. It would be inconsistent with what MGM has always done since I’ve been here."

In addition to Dubai World and T. Rowe Price, other large investors are upping their stakes in MGM. GAMCO Investors Inc. doubled its MGM holdings in the fourth quarter. D.E. Shaw & Co. LP and Blackstone Kailix Advisors, a subsidiary unit of Blackstone Group LP (BX), also made investments.

"We know MGM has a history of returning capital to shareholders," Amit Kapoor, an analyst with Rye, New York- based Gabelli & Co., a subsidiary of GAMCO, told Bloomberg. "Investors underappreciate the ability of MGM to do a share repurchase, a special dividend or both."

Kapoor added that he "fully" expects the company to do "something value-creating."

MGM Mirage shares closed at $50.64 yesterday after an increase of $1.58 (3.22%). Shares have traded from $48.52 to $100.50 in the past 52 weeks.