Dubai to Pay $5.1 Billion for MGM, Vegas Hotel Stakes

Dubai to Pay $5.1 Billion for MGM, Vegas Hotel Stakes

Dubai will invest as much as $5.1 billion in Kirk Kerkorian's MGM Mirage, giving the Las Vegas casino company a partner as it expands into real estate.

The investment helps the 90-year-old Kerkorian, who owns 54 percent of MGM, branch into hotels and condominiums as the company pursues wealthy travelers around the world. It adds to Dubai's $13.5 billion in planned acquisitions this year as the Persian Gulf state spends cash from an oil-fueled economic boom.

MGM ``is talking to partners who can help them transition from a heavy, capital-intensive business to a management business,'' said Chris Wiles, portfolio manager at Allegiant Asset Management in Pittsburgh, which owns about 300,000 MGM shares. In Dubai, ``they've got some willing-and-able buyers.''

Dubai World, owned by the government, said today that it will pay $84 each for as many as 28.4 million shares of MGM, 13 percent more than yesterday's closing price. It will invest $2.7 billion for a stake in CityCenter, a hotel and casino complex in Las Vegas, and MGM will use the cash to pay down debt.

``One of the issues that concerned me was the size of our debt'' to build CityCenter, a $7.4 billion project set to open in 2009, MGM Chief Executive Officer Terry Lanni said today. Dubai's cash will shave $3.9 billion off MGM's liabilities, he said.

MGM advanced $6.62, or 8.9 percent, to $80.94 at 4 p.m. in New York Stock Exchange composite trading for the biggest gain since May. The stock has more than doubled in the past 12 months.

Tender Offer

Dubai will purchase half the 9.5 percent stake from MGM's treasury and half from other investors via a public tender offer. Standard & Poor's Ratings Services said it may upgrade the BB rating on MGM's debt because of Dubai World's investment.

The price ``is a bargain for Dubai,'' said Larry Klatzkin, an analyst at Jefferies & Co. in New York, who has a ``buy'' rating on MGM stock and a target price of $112. ``Dubai is a passive and positive investor.''

MGM, the world's second-largest casino company, owns the Mirage, Luxor and Bellagio among its properties on the Las Vegas Strip. Its second-quarter profit more than doubled on increased condominium sales and higher spending at resorts.

Kerkorian, who was an investor in the Metro-Goldwyn-Mayer Inc. movie studio in the 1970s, bought and sold the studio three times over the years. In 1981, he opened the MGM Grand casino, building it into the world's largest, and in 2000 acquired Mirage Resorts Inc., owner of the Bellagio, for $6.4 billion.

Kerkorian Offer

In November, Kerkorian offered to buy as many as 15 million MGM shares for $55 each in a tender offer. The announcement drove the stock 16 percent higher. He ultimately purchased fewer than 450,000 shares.

In May, Kerkorian said he was considering ``alternatives'' for his stake in MGM, triggering a wave of interest in the company and sending the shares up 37 percent. A month later, he abandoned those plans, damping speculation that the company would be sold.

``It's very telling that Kerkorian didn't sell anything,'' Wiles said. ``He thinks it's a company headed in the right direction.''

Dubai will pay MGM an additional $100 million if the CityCenter project is completed on time and on budget. It also has an option to raise its MGM holding to 20 percent, and ``would like to go there once our gaming board approvals come,'' Dubai World Chairman Sultan Ahmed Bin Sulayem said in an interview.

High-End Market

``MGM is the No.1 entertainment company in Las Vegas,'' bin Sulayem said today. ``We're attracted to the high-end hotels market, and Las Vegas is high-end and high-growth.''

Gambling revenue on the Las Vegas Strip, the city's main casino corridor, climbed 5.9 percent to $6.75 billion for the year that ended July, according to the State of Nevada Gaming Control Board. That followed a 15 percent gain a year earlier.

MGM owns and operates 17 casinos in Nevada, Mississippi and Michigan and is involved in three joint ventures. Harrah's Entertainment Inc. is the biggest casino company by revenue.

Dubai World manages a range of businesses for the government, including the palm tree-shaped islands off the Gulf emirate's coastline. It owns container-port operator DP World and private-equity firm Istithmar, which this month paid $942.3 million to buy Barneys New York from Jones Apparel Group Inc.

Dubai's investment in MGM will give the casino company access to the wealthy Middle Eastern, Indian and Russian real- estate investors who are buying property in Dubai World's developments. They may also be interested in Las Vegas condominiums, Lanni said.

Marketing Potential

``We see a lot of cross marketing possibilities,'' he said, adding that MGM may eventually develop its own projects in Dubai.

Gambling is banned in the United Arab Emirates and Gulf states including Saudi Arabia and Kuwait because it contravenes Islamic Shariah law.

Through Istithmar, Dubai World owns 13 percent of Kerzner International Ltd., according to its Web site. Kerzner owns the Atlantis resort in its hometown of Paradise Island, Bahamas, and is building another in Dubai. Kerzner also will jointly develop a resort on the Las Vegas Strip with MGM.

``Through our Kerzner investment we're already into gambling, so this shouldn't come as a surprise,'' bin Sulayem said today. ``The important thing is that MGM's non-gambling revenue is rising.''

MGM is expanding into real-estate development and standalone hotels without casinos in Nevada, China and Abu Dhabi in the United Arab Emirates. The company owns 760 acres (308 hectares) on the Las Vegas strip and has contributed 40 acres to a joint venture with Kerzner International Ltd.

It was through the company's chairman, Sol Kerzner, that bin Sulayem approached MGM about buying a stake, Lanni said in an interview. The first talks were held in June on the Italian island of Sardinia, where both Lanni and bin Sulayem were attending a party hosted by billionaire investor Thomas Barrack.

The MGM deal is being made through Infinity World Development Corp., a new unit set up for that purpose.

Credit Suisse Securities was Dubai World's financial adviser. UBS Investment Bank advised MGM.

Selected from a report by Oliver Staley and Will McSheehy