FANTINI’S FINANCE: After Murren, What’s Next for MGM?

MGM’s departing CEO leaves a legacy of growth earned with tough, transformative measures, not all of which were popular. As Jim Murren eyes the exit, what’s ahead for the company he changed?

FANTINI’S FINANCE: After Murren, What’s Next for MGM?

So, Jim Murren, who’s long had to deal with activist investors, is leaving as CEO of MGM Resorts, nearly two years before his contract expires.

Murren has had a long evolution during his near-dozen years as CEO. He’s grown from a guy who spent $9 billion on CityCenter, talking about art and urban development, to a CEO talking about shareholders and profit growth.

How much of that evolution was learned on the job and how much was pressed by investors, we don’t know.

We know what MGM is today. The big open question is, what will MGM be tomorrow?

MGM has taken big, company-changing, culture-changing actions. In recent years, in its two touted EBITDA growth programs, it dramatically reduced costs, including eliminating many jobs. It’s sold and is in the process of selling its biggest and best properties. And while offering customers more entertainment, dining and convention facilities, MGM has pioneered customer-unfriendly tactics such as paid parking and ever more aggressive resort fees.

In growing EBITDA, unlocking value and refinancing debt, MGM has significantly improved its balance, a move all would agree is a positive.

So, where does MGM go now?

Equity analyst Steve Wieczynski of Stifel has sounded a note of caution, pointing out that the company has done its refinancings, announced its share repurchases, upgraded its properties, and gone through most of its EBITDA growth programs, leaving little else to drive growth.

Further, Wieczynski notes, there’s a question about how the real estate sales will play out long-term.

“Selling and leasing back MGM’s prime real estate certainly has a short-term feel-good impact,” said Wieczynski. “It’s generated money that can be reinvested, and raised valuations that lift the stock price. But the reality is that MGM becomes a tenant, and has a new expense line in rent paid to its landlords. While relationships are cozy today, we’ll see if that changes come a business-depressing recession. And we’ll see, come recession, how investors and debt-holders react to a company that no longer has the security of real estate and higher book value to cushion hard times.”

There’s a reason for the old adage that it’s better to own than to rent.

The immediate question is, who will be the next CEO? Will it be a seasoned casino executive, devoted to building the company? Or a caretaker, preparing the company to be broken up in some fashion?

We’ll soon know.

Whoa, Nellie!

U.S. regional casino stocks continue to outperform, in an overall stock market that itself is outperforming.

Every day, it seems, the regionals hit new highs: Penn National, Churchill Downs, Boyd Gaming, Eldorado Resorts, Monarch Casino, and Golden Entertainment.

The reasons for the outperformance are well known: confident consumers in a strong economy, and the aforementioned lift in valuations thanks to property sales and leasebacks.

This raises the question of whether higher valuations are the new normal, and casino companies should sell at double-digit multiples of debt-to-EBITDA, or whether valuations are stretched, and it’s time to take profits.

A bull will say that getting out now risks missing out on profits ahead.

A cautious investor might say it’s time to start trimming, capturing some profits while still keeping a stake in the future.

And a bear will sell out and repeat another old adage: Nobody ever went broke taking a profit.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.