August 22, 2007 / 10:48 AM / in 10 years

Dubai World to invest in MGM Mirage

NEW YORK (Reuters) - Dubai World said on Wednesday it will invest up to $5.2 billion in MGM Mirage (MGM.N) by buying shares and half of a major Las Vegas project, making the state-owned investment firm a major player in the biggest gambling destination in the United States.

<p>The MGM Mirage Hotel and Casino is seen in this December 14, 1998 photo. Dubai World, the investment holding firm of the Dubai government, will acquire a 9.5 percent stake in MGM Mirage and 50 percent of the casino operator's CityCenter development project for $5 billion under a deal reported in The Wall Street Journal. REUTERS/Steve Marcus</p>

MGM shares jumped as much as 10.5 percent and its bonds rallied on the pending $3.9 billion cash infusion stemming from the deal, as well as the premium Dubai offered for the shares.

Dubai, part of the United Arab Emirates, has become an influential player in global business and tourism, attracting U.S. oil services firm Halliburton Co (HAL.N), which recently opened a headquarters office there.

Increasingly, the emirate, which is building what it says is the world’s biggest airport, has been making waves far away from the Gulf. Borse Dubai has bid $4 billion for Nordic exchange owner OMX AB OMX.ST, while Dubai World’s Istithmar investment unit earlier this month beat rivals with a $942.3 million bid to buy luxury clothing store Barneys New York from Jones Apparel Group Inc JNY.N.

MGM Chief Executive Terry Lanni said Dubai’s connections to high rollers from the Middle East, Russia and India will open up new opportunities and boost its growth prospects.

“This is just the beginning,” Lanni said in an interview with Reuters. “This opens the door for us to explore other opportunities.”

MGM has been expanding overseas as new development prospects dwindle in Las Vegas, where it operates 11 casinos including the Bellagio, Mandalay Bay, and Circus Circus.

It plans to open the MGM Grand Macau in China’s gambling haven in the fourth quarter. It signed joint ventures with China’s Diaoyutai State Guesthouse and Abu Dhabi’s Mubadala Development Co. earlier this year to develop luxury hotels and resorts around the world.

BIG PREMIUM

Dubai World said it will buy 28.4 million MGM shares, or 9.5 percent of the casino operator, for about $2.4 billion. The shares will be purchased from MGM and existing shareholders, but not from Kirk Kerkorian’s Tracinda Corp, MGM’s majority shareholder.

The investment firm will buy 14.2 million shares from MGM Mirage at $84 each, a premium of about 13 percent over Tuesday’s closing price. The new shares will dilute Kerkorian’s share in MGM to about 52 percent from 54 percent, the company said.

Dubai World will also issue a public tender for an additional 14.2 million shares at the same price. The public tender is due to begin during the week of August 27.

The firm will also invest about $2.7 billion to acquire a 50 percent stake in MGM’s CityCenter project, a $7.4 billion, 76-acre Las Vegas development of hotels, condos and retail outlets due to open in 2009. Dubai World will pay MGM Mirage an additional $100 million if the project opens on time and on budget.

Larry Klatzkin, an analyst with Jefferies & Co, said Dubai World’s valuation was above his estimate and reflects a premium for quality Las Vegas projects. He said that premium could help other Las Vegas players such as Boyd Gaming Corp (BYD.N), Las Vegas Sands Corp (LVS.N) and Wynn Resorts Ltd (WYNN.O).

The CityCenter joint venture is expected to close by the end of the year. MGM will be paid to manage the development once it is completed.

LONG-TERM RELATIONSHIP

The stake purchased by Dubai World, which referred to the partnership with MGM as a “long-term strategic relationship,” will likely quell takeover talk surrounding the world’s second-largest casino company.

Tracinda in May said it planned to buy MGM’s Bellagio and CityCenter projects and would explore alternatives for its holding in MGM.

Kerkorian, however, backed off the plan in June after MGM agreed to develop a new multibillion-dollar resort on property it owns on the Las Vegas Strip. The project is to be financed by partner Kerzner International Holdings Ltd, which owns the mammoth Atlantis resort in the Bahamas and is 30 percent-owned by Dubai World.

Before the Dubai deal, Kerkorian’s moves had sparked an 18 percent rise in MGM’s shares.

Dubai World manages a range of businesses for the government including property developer Nakheel, which is developing palm-tree shaped islands off Dubai’s coast.

MGM shares were up 9.7 percent, or $7.17, at $81.49 in afternoon trading on the New York Stock Exchange after hitting a session high of $82.11. MGM’s 7.5 percent bond due 2016 rose 2.6 cents on the dollar to 99.75 cents, according to MarketAxess.

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