Two legendary investors are preparing to face off in a high-stakes game whose outcome could reshape the face of Las Vegas.
Activist investor Carl Icahn is pushing casino operator MGM Mirage to restructure in bankruptcy court, according to people familiar with the matter. The gambit pits him against Kirk Kerkorian, MGM Mirage’s largest owner and a swashbuckling investor who won and lost fortunes with big gambles in Las Vegas, Hollywood and Detroit.
Mr. Icahn and private-equity fund Oaktree Capital Management separately have acquired hundreds of millions of dollars in MGM Mirage debt in recent months. They told MGM Mirage, which must make a new equity payment by Friday on a big Las Vegas project, that they would support a restructuring in bankruptcy court, these people said.
Mr. Kerkorian holds a stake of about 53% in MGM Mirage that is valued at about $900 million, down from $14.9 billion in late 2007. His investment could be wiped out in any bankruptcy filing that gives secured debtholders priority over stockholders in doling out assets. A spokesman for Tracinda Corp., Mr. Kerkorian’s investment company, declined to comment.
MGM Mirage is one of the nation’s largest casino operators, with properties from China to Detroit and nine Las Vegas casinos, including the Bellagio. It is Nevada’s largest taxpayer and employs 50,000 workers in the state.
Mr. Icahn’s strategy is not entirely clear, though he could be after some of MGM Mirage’s prized assets, said the people familiar with his call for a Chapter 11 filing. The investor has a long affinity for casinos. He recently made a bid to buy the Atlantic City Tropicana.
Mr. Icahn had owned a little less than $500 million in the face value of MGM bonds that mature in several years, say two people involved in the matter, but that may have changed. He didn’t return a call seeking comment.
An MGM Mirage spokesman said the company “and its advisers remain engaged in constructive discussions with its lenders.”
An MGM Mirage bankruptcy would be the most spectacular in a string of implosions in the casino industry, which has been decimated by collapsing Las Vegas property values and a downturn in consumer spending and travel. Several small casino companies have either entered bankruptcy protection or are flirting with it. Others are slashing costs and struggling to cut massive debts incurred for expansions and buyouts. This week, Station Casinos Inc. said it is negotiating a prepackaged bankruptcy plan.
For the time being, Mr. Icahn and Oaktree have little leverage, but that could change in coming months. When MGM Mirage bonds come due in July and October, the bondholders could force a filing if the company is unable to make those payments. Or, if MGM Mirage were to try to tender an offer to repurchase its bonds to lighten its debt load, they could also block that move. “Right now, it is just, sit back and wait,” said a person familiar with the matter. “The company is in a jam.”
MGM Mirage has been working hard to avoid bankruptcy, and some industry observers believe it still has a good chance of doing so. It is laboring under $14 billion of debt as its revenues plummet and its expenses rise.
Investors pushed down the stock after the Wall Street Journal reported the news on its Web site. MGM Mirage shares were off 13% in late trading after losing 49 cents to $5.90 in 4 p.m. trading on the New York Stock Exchange.
The company has some unusual leverage: Its $7 billion in bank debt isn’t secured by the kind of assets typically used as collateral, meaning banks can’t foreclose on any of it properties. Those properties are still generating cash and stand to see strong profits if the economy improves.
That gives banks a reason to help MGM Mirage avoid bankruptcy. And it gives MGM Mirage some leeway to negotiate a reprieve with banks, by offering some of its properties as collateral. It also offers banks a reason to want to help MGM Mirage avoid bankruptcy, since a filing would put banks on par with bondholders, leaving the two groups to battle over the assets.
Some analysts believe that MGM Mirage can make its two big bond payments this year: $227 million due in July and $821 million in October. MGM Mirage has around $800 million in cash, much of it from the recent sale of its Treasure Island casino to investor Phil Ruffin. And the company is looking to sell at least two other properties, which could generate as much as $1.6 billion, say analysts, helping the company stay afloat.
Mr. Icahn and Oaktree aren’t working together and their strategies aren’t yet clear, those people said. They could be angling for equity in the company inside or outside bankruptcy. They could also be after some of MGM Mirage’s storied casino assets or simply want to ride out a bankruptcy with the bet that the bonds will recover far more than it cost to purchase them.
If MGM Mirage tried to buy up those bonds, then Mr. Icahn and Oaktree could block such steps.
But the move could blow up on Mr. Icahn and Oaktree if the company is able to avoid bankruptcy or it cuts deals with bank lenders and provides them liens on MGM Mirage’s assets, which could depress the recovery rates for MGM Mirage bonds.
MGM Mirage’s strategy so far “has been for now to ignore those two guys because they don’t have a seat at the table,” said a person familiar with MGM’s plans. The company is “more focused on its bank groups, their concerns and funding City Center’s cash needs,” added this person.
City Center is MGM Mirage’s $8.6 billion resort and residential project on the Las Vegas Strip that it owns jointly with Persian Gulf investment vehicle Dubai World. Dubai World is suing MGM Mirage over what it says is mismanagement and cost overruns at the development. Dubai World skipped its last equity payment on the project in March. The joint-venture partners are facing another deadline payment Friday night of $70 million. It is unclear if Dubai World will pay its half, or if MGM Mirage will foot the entire bill.
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MGM last month helped hire the law firm of Dewey & LeBoeuf LLP to handle a potential bankruptcy of the City Center project. MGM also hired the investment bank Evercore Partners to handle its own talks with lenders and other pressing financial issues.
Oaktree is betting the longer-term bonds it bought at a discount, perhaps as low as 30 cents on the dollar several weeks ago, will recover twice that or more, said people familiar with Oaktree’s thinking. Oaktree has told MGM Mirage that it wants the company to find a long-term fix, whether inside bankruptcy or with equity or debt from a new investor, which Oaktree would be open to providing, said these people.
Oaktree also holds shorter-term bonds, which come due in the next couple years, said several people familiar with the matter. Oaktree feels MGM Mirage needs to “clean up its balance sheet because it otherwise has great casinos and can take market share from rivals,” said another person familiar with the matter.
