A Stern Glance

Kirk Kerkorian, MGM Mirage’s majority stockholder, may cut his investment in the struggling casino operator.

Kerkorian’s company, Tracinda, issued a brief announcement suggesting the reduction yesterday, saying it is “exploring the possibility of strategic partnerships or other alternatives with respect to its investment in MGM and that would not engage in any such transaction until after CityCenter, the 67-acre city within a city on the Las Vegas Strip which is fifty percent owned by MGM, has successfully opened on December 16, 2009.

Tracinda believes there is substantial unrecognized value in MGM MIRAGE and CityCenter that is not reflected in the market value of MGM MIRAGE’s stock. Tracinda may decide not to pursue strategic partnerships or other alternatives, and may not ultimately enter into any such transactions.”

MGM Mirage chief executive Jim Murren noted on Tuesday that Tracinda has a long history of capitalizing on situations where investments are undervalued. I can’t speak for what their intentions are right now, but I can say that their investment intent has apparently changed,” Murren said. “And it’s gone from one as somewhat a passive investor to one that’s going to take a more active role in attempting to increase shareholder value for all shareholders.”

MGM Mirage had announced earlier on Tuesday that its third-quarter earnings will show a $955 million charge to reflect the falling value of CityCenter, its $8.5 billion joint venture on the Las Vegas Strip. MGM Mirage said its stake in CityCenter was worth about $2.44 billion as of Sept. 30.

CityCenter had to reevaluate itself after cutting prices on its nearly 2,400 condos this month to parallel a decline in Nevada’s real estate market since the units went on sale in January 2007. The 67-acre (27-hectare) project is a 50-50 partnership between MGM Mirage and Dubai World, the investment arm of the Persian Gulf state.

A one-and-a-half year slide in Las Vegas gambling revenue also has hurt MGM Mirage and its shares, which closed at $11.93 on Tuesday, up 1.1 percent for the day but down more than 87 percent from their peak Oct. 23, 2007, when they closed at $92.69.

Analysts and other investors closely watch Kerkorian, who lost his majority holding in MGM Mirage in May when the company issued new stock and he didn’t buy enough to maintain the stake.

This isn’t the first time Kerkorian has signaled he might change his MGM Mirage stake, but investors are more likely to believe something will happen this time because he let his majority stake slip, BMO Capital Markets analyst Jeffrey Logsdon said in a note to clients.

Murren said investors are regaining their interest in casino and hotel companies now because of a sense that the economy is turning around.

“I know just from the dialogue that we’re having that there are more people interested in the gaming sector than earlier this year when the future of a lot of these companies in the industry was in doubt and the economy was in worse shape,” Murren said. “We’ve turned the corner.”

Kerkorian also referred in 2007 to “substantial unrecognized value” when he tried to buy CityCenter and the Bellagio resort next door from MGM Mirage.

MGM Mirage said it will report charges of about $200 million before taxes on its third-quarter results for its share of the write-down in CityCenter’s residential developments, in addition to the $955 million charge to reflect the project’s overall drop in value.

“Investors have long expected (and will probably expect further) write-downs of the carrying value of its residential towers at CityCenter,” Logsdon said. “We do not expect investors to have a negative reaction to this step.”

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