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Thu 30 Aug 2007 04:34 PM

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Viva Las Vegas!

The $5.2bn MGM Mirage deal is a bold new move for Dubai World. Does a fortune lie waiting in the Nevada desert?

They like trophy assets. They like prime, prime hotels" says Eric Anton, principal at Eastern Consolidated, a New York property investment services firm, on the recent announcement that Dubai World will pay US$2.4bn for 28.4 million shares in MGM Mirage, as well as pour US$2.7bn into a new gaming resort on the Las Vegas Strip. It seems an unlikely pairing - an investment firm from the UAE and a Las Vegas company with heavy interests in gambling - but actually it is an ideal marriage. Dubai has for some years been compared to the entertainment capital of the world, with its World and Palm projects and booming high-end hotel industry.

Under its company umbrella Dubai World owns Nakheel Hotels & Resorts, is partners with India's Taj chain of luxury hotels and resorts and Jumeirah's Essex House in New York, while MGM runs the Mirage, Luxor and Bellagio hotels. It is this common interest that has brought the two together. Christopher Snow, an analyst at CreditSights, believes the pairing makes strategic sense. "The placement of equity with an oil rich partner provides MGM with the right non-strategic candidate who, in the current environment, is somewhat self-reliant. MGM's choice of partner is advantageous since the 13.5% premium paid by Dubai World represents a lower cost of capital than would have found on the public markets."

We are attracted not by gambling but by high-end hospitality. This is the world’s best hotel company.

A spokesperson for Dubai World tells Arabian Business that MGM's emphasis on luxury is an incentive, "Part of the attraction to MGM Mirage and its leading brands is the promise of what we can do in other growing markets with an appetite for luxury accommodations and retail, such as Dubai, China, India as well as further expansion in the US."

They added, "We have watched the growth in Las Vegas for many years. It is an attractive market that caters more and more to luxury living and family travel. It made sense for Dubai World, with its expertise in large-scale, luxury developments in other global markets to make further investments in that growth in the US."

CityCenter, a 4000 room resort casino with two non-gaming hotels, 2650 apartments and 470,000ft of retail space, currently under construction, is what analysts predict will be the first in number of joint ventures. CityCenter Holdings will be a 50/50 partnership, between MGM Mirage and Infinity World Development Corp, a wholly-owned subsidiary of Dubai World.

Analysts say the deal is a coup for MGM's 90-year old billionaire, Kirk Kerkorian, who owns the controlling stake in MGM. A Vegas veteran, Kerkorian has been building Las Vegas landmarks since the 1940s. Snow says: "Dubai World can purchase up to 20% of MGM as long as Kerkorian remains at least a 25% owner of the company. This creates a potential opportunity for Kerkorian to monetise his stakeholding without putting downward pressure on the market that would then be affected by publicly selling his shares."

Terry Lanni, chairman and CEO of MGM Mirage, adds: "The deal is an absolute win for everyone. It's a win for [Kerkorian's investment company] Tracinda and gives him a significant investment partner."

An Emirati company investing in Las Vegas was always going to raise eyebrows but Dubai World has defended its decision by emphasising its small but long-term stake in Kernzer International, the owner of the Bahamas Paradise Island Casino. Sultan Bin Sulayem, chairman of Dubai World, says the deal shouldn't come as a surprise. In an interview with Arabian Business, he said: "We are attracted not by gambling but by high-end hospitality, this is the best hotel company in the world and we are now a part of it."

Typically the summer isn't the best time to make or break a major deal, particularly in the Middle East. However, the timing couldn't have been better for MGM, which in recent months has been subject to an ever increasing budget for CityCenter. This year the multi-billion dollar development has already pushed the company's expenditure budget up to US$3bn and, up until now was on course to overspend by a similar amount next year. "Primarily, the deal alleviates some of the liquidity pressure over the next year as heavy spending on CityCenter has pushed the company's budget up," says Snow.

The additional US$100m, which will be given to MGM under the terms of the agreement if the project is completed on schedule and budget, should ensure a speedy completion.

For some, Dubai World has saved the day for MGM and its CityCenter project. Two months ago Kerkorian announced that Tracinda was entering into talks with MGM. Analysts announced that MGM's event risk (the likelihood that the rating of a bond will drop due to an event, such as the taking on of additional debt) had dropped following the 90 year-old's statement. Snow adds: "The agreement closes out a lot of the uncertainty that has been hanging over the credit since Tracinda's mini-tender.

"We will probably never know whether it was a ploy to induce others into action or whether the investor got the message that a deal was already in the works."

Ratings agencies have also applauded the engagement. Standard & Poor's quickly issued a press release saying it could raise MGM Mirage's rating up one grade from a BB rating if the company uses a significant portion of its investment from Dubai World to pay down debt. A spokesperson at S&P told Arabian Business, "Gross proceeds to MGM Mirage are expected to be about US$3.9bn. If a significant portion of the proceeds are used to permanently reduce debt, a one notch upgrade of the ratings would be considered."
Moody's and Fitch also revised its outlook from "negative" to "stable" but Moody's says its ratings upgrades still depend on MGM showing improvement in its balance sheet or reducing its debt.

"If all proceeds from Dubai World are used to repay debt. Leverage would drop significantly" says a Moody's spokesman. The agency, however, remained apprehensive: "Given the company's commitment to growth, leverage may begin to increase over the immediate term and residual event risk would remain a concern."

The deal comes at a time when MGM's rivals are becoming more susceptible to worsening credit conditions. Harrah's Entertainment, MGM's biggest competitors is currently in the middle of a US$17bn takeover by several large private equity groups, Texas Pacific Group and Apollo Management Group, however, the deal is one of a number of highly-leveraged buyouts to have been affected by the credit crunch hitting the markets.

Terry Lanni, MGM Mirage chief executive, says it will limit Harrah's ability to grow. "Clearly, it will have an effect on capital expenditure. It puts us at a big advantage."

As soon as the deal was signed MGM's share price immediately rose to 9%, while its debt protection costs dropped around US$223,000 a year (70 basis points).

The black book-swapping potential for the two companies will form a long-term partnership with both companies hugely benefiting from the other's expertise. For MGM Dubai World not only provides much needed capital, it will also offer an entire address book of Middle Eastern investors keen to enter the US real estate market, namely at the heart of the strip in Las Vegas. MGM's Lanni says: "The great advantage with Dubai World is they are selling villas and condos to people we don't even know. They are selling condominiums for four times per square foot than we are."

Dubai World's first foray into the Las Vegas market will also provide it with a number of business opportunities Stateside as well as on-the-job experience. Albert Momjian, head of Calyon IB, tells Arabian Business: "The deal will certainly strengthen Dubai World's position in becoming one of the leading players, in the region as well as globally."

"A lot of people make similarities to Dubai and Las Vegas and Dubai World will certainly learn a lot from MGM in terms of deals, structuring them and ways in which to develop new ventures. They also will learn how to diversify their source of funding because they will be closer to other major developers and investors from the US. Those guys understand this business and what Dubai is all about and they will support Dubai World in other ventures," he adds.

A number of UK and Stateside analysts have confirmed it may not be long before MGM invests in a non-gaming development in Dubai and vice versa for Dubai World in the US. Calyon adds: "Just looking at MGM and its sponsors backgrounds and profiles on a few of the projects they have done will and one can automatically imagine what type of projects will be making their way to Dubai with the exception of gambling."

Snow agrees: "By pairing up with Dubai World, MGM can potentially leverage their operational experience in the Middle Eastern market.

"As it stands now, MGM has a portfolio of some of the stronger properties in the gaming market, with a heavy footprint in Las Vegas. The largest source is gaming but the related hotels and entertainment offerings are also a significant part of MGM's operations."

"For Dubai World, that is some what immune to this volatility, the deal allows them to put their resources to work on a strong American brand in the gaming industry," he adds.

As unlikely as the deal between the two companies might once have looked, they are set to gain even more trophy assets both now and in the future.

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