MGM’s $8.5 Billion Recovery Bet

Published on Tuesday, 24 November 2009 07:30 Written by Christopher Lynn

Las Vegas, Nov 24 (TradersHuddle.com) – City Center, the joint between the MGM Mirage (NYSE:MGM) and Dubai World, is set to open starting December 1^st.

The 8.5 Billion hotel/condo/casino/shopping complex, with its six glass and steel towers, is billed as the largest privately funded construction project in America. The opening of this giant complex will be done in stages with Vdara the resort-condo on December 1^st, Crystals the retail, dining and entertainment complex December 3^rd, the Mandarin Oriental on December 4^th, and finally its focal point and main resort casino Aria on December 16^th.

City Center is viewed by many as Vegas big gamble on the economic recovery, with $1.2 billion over budget the project is controversial and analysts fear that the returns will not materialize in a way to justify the enormous investment, especially in the current economic environment.

Timing could not be worse, with convention attendance dropping and less visitors, resorts have been heavily discounting to drive traffic, even Wynn’s (NASDAQ:WYNN) Encore, which is one of the newest resorts in the strip has come down in price, as the market has shrunk and competition is fierce.

City Center is also a big bet on real estate; the complex has 2,400 condos, with about 50% already sold. The market as elsewhere in the country is dismal, so condos that were going for $500,000 now are being marketed at about $350,000.

However City Center’s developers see that the complex offers something different in Las Vegas, no flashy neon lights or volcanoes, just a sense of unique, refine, and leading-edge design. City Center, in their view will help spark economic development and bring back the Vegas glitter in the world stage.

MGM Mirage (NYSE:MGM) faced serious struggles at the height of the credit crisis, and had to seek outside finance, in order to complete the construction project that employed 10,000 workers around the clock. Until Dubai World came aboard, there was great concern that the project would in bankruptcy.

The complex opening comes on the heels of MGM’ third quarter net loss of $750.4 million. The company wrote down the value of City Center and faced declining room and gaming revenue. Now that it's about to open, MGM (NYSE:MGM) is entering the fierce competition with special deals, like 2 nights for the price of 1.

Analysts estimate that 10 to 30% of City Center’s revenue will be incremental for the market as the complex will generate new demand; especially as City Center hopes to attract a more sophisticated guest that normally do not consider a Vegas vacation. The rest of the revenue will come from existing casinos and resorts, including MGM’s own strip casino resorts.

Short term, City Center will be harmful for the other resorts, and will surely operate in the red, but long term if the economy recovers to a level close to levels before the credit crisis, the complex could be a big winner for MGM Mirage.

However the jury is still out on the shape of the recovery and if it will take us to the “old normal” or the “new normal”, where consumers have definitely shifted their spending habits, and there would not be enough wealthy consumers to support such a big high end retail and hotel complex.