MGM Resorts International doubled down on its East Coast presence announcing it will but Boyd Gaming’s 50 percent interest in Atlantic City’s Borgata Hotel Casino & Spa for 0 million, giving it full control of the property.
The transaction includes the Borgata casino and hotel and its non-gambling Water Club hotel next door in the city’s Marina District.
Under the deal, MGM will then sell the entire property for $1.18 billion to recently created real estate investment trust MGM Growth Properties LLC and operate the Borgata under a leaseback accord, the companies said Tuesday in a statement. MGM Growth will receive rent of $100 million a year under the lease, the company said.
MGM already owned 50 percent of the Borgata, but was a passive investor in the casino with Boyd being the managing partner. MGM had put up its equity for sale during a long approval battle in New Jersey over the company’s partnership with Pansy Ho in Macau. The dispute was settled in 2014 when MGM bought enough of Ho’s equity to reduce her stake in MGM China to 25 percent.
Boyd expects to receive $600 million in net proceeds after deducting its share of the property’s debt and also 50 percent of tax refunds owed the casino by the city of Atlantic City. Borgata estimates it’s entitled to tax refunds from the city totaling $180 million, according to Bloomberg News.
MGM Resorts Chief Executive Officer Jim Murren said the company made the deal to continue its expansion into the East Coast, which includes a casino opening later this year in National Harbor, Maryland, and another scheduled for 2018 in Springfield, Massachusetts.
MGM will be able to use its database of 60 million customers to promote the Borgata and achieve cost savings by making the property part of a larger enterprise, Murren said.
“We viewed Borgata as what it is, a high-quality, high-performing property that’s bucked the trend in a very rough market,” Murren said.
Under the joint venture partnership with Boyd, neither company was permitted to use the Borgata customer database to promote anything other than Borgata.
“Borgata owns the database. Boyd doesn’t own it, and MGM doesn’t own it; it’s Borgata, which is somewhat frustrating,” MGM President Bill Hornbuckle told GGB magazine in an April story on MGM expansion.
The Borgata is the leading casino in Atlantic City and has continued to bring in strong revenue despite a severe downsizing of the Atlantic City market. Atlantic City saw four casinos close in 2014 and has seen its total casino revenue fall by almost half since 2005 to $2.41 billion last year.
Borgata generated earnings of $212 million before interest, taxes, depreciation and amortization, and revenue of $812 million for the year ended in March, MGM Resorts said in a release.
It also comes quickly after a long, contentious battle between the city and Trenton over the municipal government’s finances that had left the city close to bankruptcy. Though the battle had little effect on casino operations—which are overseen by the state—it has led to months of negative headlines about the resort’s future.
Coincidentally, the deal was announced the day after Governor Chris Christie signed a bill that bails out Atlantic City’s fiscal situation and establishes a “PILOT” system (payment in lieu of taxes) for the city’s casinos that establishes a set annual payment to Atlantic City instead of property tax via assessments.
Borgata has been seen as a game changer in Atlantic City since it opened in 2003 as a joint venture between Boyd and MGM, and has lead the market by significant amounts since it opened. The casino is also in the city’s marina district, which has not seen a casino closing.
The Atlantic City market also faces a possible challenge if New Jersey voters approve the building of two new casinos in the northern part of the state in November. If approved, those casinos are expected to draw heavily form the New York market, and many analysts feel that will further depress the city’s casino market, which has shown signs of stabilizing since the 2014 casino closings.
“Borgata is the premier resort in Atlantic City and a great addition to our growing presence in the Northeast,” Murren said in a statement. “While the market continues to experience challenges, Borgata has outperformed and differentiated itself as the undisputed leader in the city. Our decade-long partnership with Boyd Gaming has been a great one, and Borgata’s talented employee base will complement and strengthen our more than 60,000-member worldwide MGM Resorts team.”
Murren’s statement did not mention the North Jersey expansion that gives Atlantic City casinos a 60-day window to bid on a northern project should the referendum be approved. But in the April story in GGB, Hornbuckle said MGM would be a participant in the process.
“We’re looking at North Jersey because we have to,” Hornbuckle said. “If something’s going to happen there, we have to be involved.” A preliminary bill gives Atlantic City casino companies favorite status when bidding for what will likely be two casinos in North Jersey. MGM would have been permitted to bid even without the Boyd deal, however, since it is a state casino licensee.
According to Bloomberg, MGM Resorts, under pressure from activist investor Land & Buildings Investment Management LLC, created MGM Growth Properties as way to boost its stock price. Real estate investment trusts generally trade at higher valuations than regular corporations because they don’t pay income taxes, distributing profits instead directly to shareholders. MGM Growth raised over $1 billion in an April public stock offering, the news service said.
The purchase will be financed with cash on hand, borrowed money and “the issuance of operating partnership units to a subsidiary of MGM Resorts, based upon MGP’s closing price of $23.03 as of May 27, 2016.” The deal is expected to close in the third quarter of this year.
For Boyd the company has also been taking steps to revamp its portfolio, acquiring three casinos in Las Vegas for $610 million since April, Bloomberg News said.
Boyd Gaming CEO Keith Smith said Boyd intends to use the sale to reduce debt and strengthen the company’s balance sheet.
“While we are pleased with the performance of this property, this transaction is an attractive opportunity to immediately unlock significant value for our shareholders,” he said.
In 2010, MGM tried to sell its stake in the casino while in a regulatory battle in New Jersey over its ties to an Asian business partner in Macau—heiress Pansy Ho—but a buyer was never found. New Jersey regulators declared that the relationship and sufficiently changed and allowed MGM back into the state. MGM’s interest in the casino had been held in trust while the regulatory process played out.
