MGM Resorts International plans to slash labor costs by $100 million over the next two years—cuts that could eliminate around 2,000 jobs—as part of a new strategy aimed at silencing the grumblings of activist investors by boosting annual EBITDA by $300 million or more.
MGM 2020, as the plan is titled, will result in “a more centralized organization to maximize profitability and, through key investments in technology, lay the groundwork for the company’s digital transformation to drive revenue growth,” the Las Vegas-based casino giant said.
It comes as MGM continues to grow operations globally and corporate expenses with it. In the last year, the company opened the $960 million MGM Springfield in Massachusetts, the $3.4 billion MGM Cotai in Macau, and spent more than $600 million to transform the Monte Carlo on the Las Vegas Strip into the Park MGM and NoMAD Las Vegas. The portfolio is being further expanded with the purchase of casinos in Ohio and New York. The company also is pushing aggressively for one of three possible IR licenses in Japan, where a few years ago, rival Sheldon Adelson famously set the development bar at $10 billion, calling the Japanese market the “ultimate business opportunity.”
To that end, MGM has recruited former Nevada Governor Brian Sandoval, who wasn’t out of office more than 24 hours earlier this month before announcing that he was joining MGM as president of Global Gaming Development.
One of the stars of the Nevada Republican establishment, Sandoval, 55, served as chairman of the Nevada Gaming Commission and state attorney general before winning two terms as governor
Last August, he led a trade mission to Japan along with several other governors and is known as a patient and effective negotiator.
“MGM Resorts is a global leader in gaming and entertainment, and I look forward to joining the MGM team led by (Chairman and CEO) Jim Murren, someone who I greatly respect. Jim has formed critical relationships in Japan and in sports and I look forward to building upon this strong foundation,” he said.
“Governor Sandoval brings an unparalleled level of skill, leadership and experience to the company, and we will benefit greatly from his in-depth expertise in gaming, public policy and economic development,” Murren said.
Analysts, meanwhile, reacted positively to the release of MGM 2020, viewing it as an appropriate response to the realities of the company’s standing.
“There has always been a debate about the degree to which MGM is centralized and whether or not there is an opportunity for the company to benefit from more centralized operations,” said Jefferies gaming analyst David Katz.
MGM will operate 18 casinos in the U.S. when it completes the New York and Ohio acquisitions, but its domestic operations remain heavily weighted on the Las Vegas Strip.
Credit Suisse analyst Cameron McKnight said the cost-cutting will enable MGM to shrink the profitability gap with Caesars, whose Strip properties have cash flow margins around 37 percent, compared with 30 percent for MGM.
MGM’s shares have fallen 25 percent over the past 12 months, compared with a 7.3 percent drop for the S&P 500, as the company has missed its own quarterly earnings targets. The decline has sparked media reports that restless investors are interested in shaking up the company. The question is whether the promise of significant new cash flows will act to stymie their activities.
Chad Beynon, an industry analyst at Macquarie Securities, said of the announcement: “It’s a very prudent thing for MGM to do it at a time when their shares are at multi-year lows.”
MGM 2020 is built upon two familiar corporate drivers: revenue growth through expanded applications of technology and improvements in operating efficiencies to enhance profitability.
Half of the savings would come from labor reductions with 25 percent coming from sourcing and 25 percent from optimizing revenue. MGM will reallocate a portion of its annual capital expenditure budget to specific technology advancements, changes which the company says will grow market share through innovation and elevate the guest experience through better data, pricing, digital and loyalty capabilities.
The cost-cutting piece implies the loss of around 2,000 jobs, most of them at the managerial level, although the company said some union jobs could be eliminated.
The end result by 2020: a forecasted boost to operating cash flow by as much as 39 percent to $3.9 billion.
“With a playbook in hand, we have greater conviction in the long-term forecast,” said Union Gaming analyst John DeCree.
In Massachusetts, observers of the state’s gaming industry are wondering how MGM Resorts International’s recently announced plans to cut its U.S. payroll will affect the MGM Springfield, which has been operating for less than six months.
The cuts will give MGM’s cash flow a $200 million boost by the end of 2020 and another $100 million a year later. It can be traced back to efforts to consolidate business functions at its Las Vegas HQ. More savings will be realized by more efficient sourcing of goods and services and revenue optimization.
MGM Resorts International had 68,000 U.S. employees as of last year, with 51,000 working in Las Vegas.
The company has declined to address questions how this will affect the MGM Springfield, which has about 2,900 employees. Jobs creation was a major part of the company’s campaign to legalize gaming in the Bay State.
A 3 percent cut in payroll expenses does not necessarily mean a 3 percent cut in workers.
MGM Chairman and CEO James Murren in a statement announcing the planned cuts stated, “Today, we are taking the next step in our evolution as an organization.”
He added, “We are building on the strong foundation that we have solidified over the past few years, to deepen our efficiencies and achieve sustained growth and margin enhancement. MGM 2020 is intended to further transform the way we operate and leverage the most effective operational architecture for our company.”
Meanwhile the MGM Springfield is having to address commitments it made to the city of Springfield to underwrite and present performances at downtown entertainment venues in light of the December closing of CityStage after 20 years as a tenant at the Columbus Center parking complex. So far, the Springfield Parking Authority, which owns the venue has not announced plans for a new tenant.
City Solicitor Edward Pikula told the Republican, “We will be reviewing the situation with the Parking Authority and internally to coordinate with any plans for renovations or improvements before approaching MGM about the situation.”
Under the Host Community Agreement with the city MGM must underwrite, promote, book and schedule at least three events every year at CityStage for five years. Plus four shows a year and the MassMutual Center and three events at Symphony Hall.
MGM took over management of the MassMutual Center and is bidding for Symphony Hall. The Parking Authority, by contrast, has not yet asked for proposals for CityStage.
In a separate but related development, Springfield Mayor Domenic J. Sarno announced the appointment of three persons to serve on the 11 seat MGM Springfield Community Advisory Committee. The committee gives recommendations to the city and the casino on matters relating to the casino.
Sarno announced the appointment of Leo Florian, president of the South End Citizens Council; Jose Claudio, chief operations officer for the New North Citizens Council; and Denise Jordan, executive director of the Springfield Housing Authority.
The city council previously appointed three members: Daniel Patrick Morrissey, Vanessa Otero and Johnnie Ray McKnight. The remaining members will be appointed by the casino, the Affiliated Chambers of Commerce of Greater Springfield and the Massachusetts Latino Chamber of Commerce.
