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MGM-Dubai World Deal Just The Beginning?

Posted: Aug 27, 2007 12:32 PM by Glenn Curtis

Tickers in this Article: HET, MGM

Last week MGM Mirage (NYSE:MGM) announced it is teaming up with Dubai World to help construct its sprawling, $7.4 billion CityCenter Project currently being built on the Las Vegas Strip.

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Dubai World, the investment holding company for the Dubai government, will invest approximately $2.7 billion into the 66-acre, futuristically-themed project which will include a 4,000-room hotel and casino, 1,650 luxury condo-hotel units, three smaller boutique hotels and 550,000 square feet of retail space. The first phase is slated to open in 2010. In addition, Dubai World plans to purchase up to another roughly $2.4 billion in MGM stock.

In short, this is good news for MGM - really good news.

First off, the $2.7 billion from Dubai takes an awful lot of pressure off MGM to get the property up and running and to draw foot traffic in the door. Another attractive feature of relationship is that wealthy Dubai citizens will probably have first crack at a number of the high-end condominiums.

Then there's the equity investment. The fact that Dubai World is willing to take such a large stake (approximately 9.5%) in MGM tells me that it's probably serious about building out its relationship even further, possibly with other co-development projects in America. Also, the fact that Dubai World is expected to pay $84 a share for its stake (a roughly 4% premium to the current price and a roughly 13% premium to the pre-deal price) is in my opinion another good sign that "smart money" investors think the stock is undervalued.

Incidentally, the equity stake also suggests that maybe, just maybe, this could be a prelude to a larger transaction - such as the company being acquired or taken private. Of course, that's speculation on my part. Nevertheless, with billionaire and majority shareholder Kirk Kerkorian likely pulling some of the strings behind the scenes, nothing would surprise me.

Should Investors Gamble With MGM?
Although I'm skeptical about the near-term outlook for the travel industry and consumer spending, I do think it makes sense to nibble at this stock. With that in mind, here are some of the other things that I find attractive about MGM.

1) The company's President and CFO is James Murren. For those unaware, Murren cut his teeth as a gaming analyst at Deutsche Morgan Grenfell in the 1990s. In fact, I used to talk with him every couple of weeks back then about certain companies, including MGM. I think he is sharp as a tack and knows the ins and outs of this industry.

2) MGM owns and operates 19 properties throughout Nevada (with a big concentration in Las Vegas), Michigan and Mississippi. I believe that its geographic diversity helps mitigate the risk of regional economic downturns.

3) MGM is considered to be a shrewd operator that has some influence in almost every gaming jurisdiction and future jurisdiction in America.

4) The company has room to expand, possibly overseas. And this is another potential upside to the Dubai deal.

5) While insiders have been net sellers of the stock over the last six months, executives have also purchased more than 13,000 shares during that same time. The fact that insiders are buying stock and hold roughly 1.6 million shares should give them ample incentive to drive shareholder value in the long term.

Earnings and Valuation
Wall Street expects the company to earn $2.22 per share this year and $2.69 per share in 2008. That implies an anticipated growth rate of about 21%. That's solid growth, especially for a company of this size.

However, on a P/E basis, at 36-times this year's forecast, the stock is hardly cheap. Keep in mind that other big name competitors such as Harrah's Entertainment (NYSE:HET) trade at roughly 23-times this year's earnings estimate of $3.62. Using other metrics including price to EBITDA doesn't make the stock any cheaper.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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