MGM Mirage earnings

BAC:

Preannounces 3Q and liquidity initiatives MGM preannounced 3Q results and initiatives incl: 1) issuing 41M shrs (est. ~$500M in net proceeds), 2) a Borgata offer ($426M total), and 3) Macau loan repayment ($125M). In total these could raise ~$1B, which should improve MGM’s liquidity cushion through 2012. While we think MGM could have raised more, the moves are clearly a step in the right direction to fixing the bal. sheet.

Liquidity initiatives are positives

MGM is issuing 41M shares (9% dilution) and Kirk Kerkorian is also selling another 28M shares. We est. MGM will receive ~$500M in net proceeds, a positive for the balance sheet. Also, MGM has an offer for its Borgata stake valuing it at $100-200M more in proceeds than we originally thought. The offer is a positive, but is non-binding, subject to diligence and timing remains uncertain. The Macau loan repayment is a near-term positive as well, but it feels to us like it’s just pulling forward some of the eventual IPO proceeds.

Q3 results look light on the back of Friday’s numbers

Total 3Q EBITDA is $280M (down 28% Y/Y) vs. our $315M/$302M consensus. Strip metrics were light: RevPAR -2% vs. our +3%, gaming revs -9% vs. our -4%, and margins of 21% vs. our 23%. CityCenter inflected to positive EBITDA, but still lost $2M ex. hold. These numbers mostly trail the market averages we saw on Friday for slot drop, table drop and RevPAR, and support a slower recovery.

Improves liquidity thru 2012, but still betting on recovery

We now estimate MGM has $3.0B in uses (debt maturities/CC funding) vs. $2.1B of sources (including cash, credit facility, equity raise, etc.) through 4Q12, which should be sufficient liquidity when combined with existing cash/revolver capacity to get through 2012. Leverage remains high (8x net leverage proforma ‘11E vs. 9x prior) and FCF remains negative, meaning deleverage is still mostly depending on a large macro recovery

UBS:

Today’s Offering Not As Dilutive to Our $12 PT We had viewed Aug market results from Las Vegas (released last Friday) as
encouraging, but had been concerned about the potential for dilution from an
equity offering as MGM addresses its leverage issues. Interestingly, the potential dilution from today’s announcement is not as negative as we had feared, but the preliminary Q3 results are worse than expected. Even at a 20% discount to MGM’s closing price on Tuesday, this 40.9 mill new share offering would not be dilutive to our $12 target given the stock’s 16% trade up in the last 3 sessions.
␣ MGM Q3 Results Disappoint Q3 results indicate that RevPAR declined 2% rather than stabilizing, as we had expected and gaming revs declined 9% vs. the 1% decline that we had estimated.
␣ Removing Near-Term Balance Sheet Risk Thru 2012 Depending on where the offering is priced, we believe the offering could raise approx. $500M. Together with its existing liquidity, the potential of $300-400M in proceeds to MGM from a Hong Kong IPO, $250M from sale of its 50% Borgata stake, $114M in Borgata trust & $71M from Borgata land sale, MGM has liquidity to get through 2012, a long runway to allow for cash flow to show some recovery.
␣ Valuation: 12 month Price Target of $12
Our MGM PT of $12 is based on PV of ~9-10x 2012E U.S. EBITDA, ~12x Macau EBITDA, land value and our estimate of proceeds from sale of Borgata interest

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