Kerkorian’s mixed message; Winners & Losers

Earlier this week, Hudson Securities analyst Robert LaFleur — something of a maverick in the gaming sector — voiced doubts about MGM Resorts International‘s ability to sustain its debt covenants. With an overhang of $13 million in debt, few properties that can be flipped (many of them heavily mortgaged, too) and relatively little cash on hand, MGM was heading for a 2Q11 collision with reality … or so LaFleur’s argument ran.

It didn’t take MGM long to respond, in the form of a new, 41 million-share issue, announced late yesterday.  The initial expectation is that this float will bring in $500 million (augmented by a like amount from the much-hyped Hong Kong IPO), further bolstered by a $250 million offer for MGM’s half of Borgata, 37%-50% less than MGM hoped to receive but still 8X-8.5X cash flow. Surprisingly, the bid didn’t come from Boyd Gaming, which is still mulling whether or not to exercise its right of first refusal. Unless it was waiting to see how low the floor for Borgata offers was, Boyd’s inaction would seem strange in view of the fact that it has considerable reserves of untapped borrowing capacity and no development irons in the fire.

Once Borgata is sold, the State of New Jersey will release nearly $115 million in Borgata revenues that it’s been holding in trust. MGM Grand Paradise will also retire a $125 million loan from its parent company. All this anticipated income may take some of the sting off the third-quarter report. MGM expects to report anemic cash flow (especially Aria‘s $41 million), though it’s getting more bang for its room buck at Bellagio and Mandalay Bay (a faux-folksy way of saying “RevPAR is better than expected”). MGM Grand apparently got sucked out by gamblers and CityCenter is contributing half as much EBITDA as the Beau Rivage/Gold Strike Tunica twosome. Significant writedowns associated with Borgata and CityCenter, converting a profitable 2Q10 into a loss-leader, including a $279 million writeoff on The Harmon, runt of the CityCenter litter.

Against this backdrop, Kirk Kerkorian (above) had the exquisitely bad timing to announce that he’d be liquidating even more of his stake in the company, taking his minority ownership down from 37% to 28% In a prepared statement, Kerkorian said he still believed MGM was a dandy long-term investment play — but he’s sure got a funny way of showing it. Further cold water was flung upon the company by Wells Fargo analyst Carlo Santarelli. Referring obliquely to recent blue-sky pronouncements by CEO Jim Murren (not to mention Sheldon Adelson over at Venelazzo), Santarelli wrote that “the numbers don’t indicate much of anything has changed” on the Strip, citing weak RevPAR trends, among other things. He also noted that MGM’s cash cow — baccarat — wasn’t doing beans for cash flow, -16% last quarter. Aria is especially reliant upon table play, which accounts for as much as 68% 0f cash flow.

Santarelli declared he was “left uninspired,” though he lauded progress on the liquidity front, estimating that the company will net $940 million or so from its latest spate of activity. Perhaps the brightest light on the horizon is the progress MGM is making in Macao, where its market share has crept right up to low-double-digit range, nicking 10% last month. Net revenue for every jurisdiction not named “Las Vegas” actually rose last quarter, although only MGM Grand Detroit improved its cash flow, too. Corporate expenses are down 14% year/year but debt servicing is up 57%. I used to be moderately bullish on MGM and now can only wonder what I was thinking. D’oh!

P.S.: Wall Street is taking a shine to Harrah’s Entertainment once again. What’s $19 billion between friends? While MGM is raising money to try and retire debt, increased liquidity at Harrah’s always means but one thing: retail therapy!

Premature victory lap. After three weeks of operation, SugarHouse is dancing on Atlantic City‘s grave, to hear the Philadelpia Inquirer tell it. Taken in a wider context, September’s gaming numbers from the Boardwalk weren’t nearly the catastrophe that I, for one, anticipated. That said, the real apples-to-apples comparison happens in a month, when SugarHouse has had a full month to eat into the Atlantic City customer base.

Winners and losers. Add the name of Lloyds Banking Group to the roster of financial houses that crapped out in the Vegas market. The architect of its catastrophic M Resort loan sailed away on a nice golden parachute, though … Franchising rights to the Hard Rock name in the western U.S. haven’t been a bonanza for Morgans Hotel Group but it could hit paydirt in Lake Charles, Louisiana. The racino group that’s licensing the HRH name still has to beat out competitors who include surging Penn National Gaming and ex-Pinnacle Entertainment boss Dan Lee … Pinnacle’s own ongoing retrenchment could extend to the sale of its badly struggling Boomtown property in Reno (a town with no “boom” in it) … A pair of tribes want to build a casino on Ohio land it bought for $1 from convicted felon James Traficant. (And you thought land values in Vegas were low!) Why do I have a bad feeling about this?

One man’s recovery is someone else’s recession. The overall trends noted by The New York Times are writ especially large in Las Vegas. Does “an enormous oversupply of houses and office buildings and crippling debt” sound familiar? It’s not that America’s fallen and can’t get up: It just may take another decade to do so. This is not what the electorate wants to hear, so we could see biennial congressional purges — and 24-month economic policies — for eons to come. (If you read the NYT story, you’d better have your spouse hide all sharp objects beforehand.)

If we’re entering what one economic calls “a period of austerity,” the casino industry needs to recalibrate its business models and expectations, stat. (It’s still modeling around a 2011 recovery.) All of a sudden, Jim Murren’s prophecy of a Vegas Strip with no new development until 2020 doesn’t sound so apocalyptic, does it? That screaming sound you hear is gaming executives jumping off 4,000-unit condo-hotel towers or rushing to the Vdara Death Ray to incinerate themselves.