Wednesday, July 23, 2008

Takeover touted for MGM?

"With the stock trading at such a discount, notwithstanding the rally in the past few days to 30 a share, there is a strong likelihood that a buyout offer for MGM at about 50 a share will surface," says Stuart Shikiar, president of Shikiar Capital Management, which owns shares. Kerkorian, he notes, is now 91 and may be looking for a profitable exit from the stock. Given that Dubai paid a lot more for its stake, it may be thinking of doing a deal with MGM and Kerkorian for a buyout, says Shikiar. He figures that excluding the shares now held by Kerkorian and Dubai, the number of shares in public hands totals 125 million. At $50 a share, the amount needed to take MGM private, estimates Shikiar, is $6.2 billion.

With MGM's cash flow of $2.3 billion, a deal to take the company private at $6.2 billion is definitely attractive and doable, he says. MGM posted revenues of $7.7 billion and net income of $1.4 billion, or $4.70 a share, in 2007. Of late, the company has been busy buying back stock. In the fourth quarter of 2007, it repurchased some 7 million shares at $90 each, followed by another purchase of 15 million shares in the first quarter of 2008 at $80 a piece. It repurchased another 7 million shares subsequently at an average cost of $72. And in May it bought back 20 million additional shares, at $61 each.

Who would go after MGM? Shikiar believes Dubai World, probably in partnership with some Asian investors and U.S. private equity groups, may decide to pursue MGM in a nonhostile manner. Dubai has struck a standstill agreement with MGM to limit its stake to 20%. So any deal will have to be mutually agreed on between Dubai and MGM's board. Foreign investors are limited to a 15% ownership in U.S. casinos, notes Shikiar, which means that Dubai and other foreign investors will have to team with U.S. private equity groups or investors to swing a deal.

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