MGM Grand Inc.
MGM Grand Inc.
Incorporated: 1986 as MGM Grand Inc.
Sales: $721.8 million (1995)Stock Exchanges: New York
SICs: 7011 Hotels & Motels
A leading hotel and casino operator, MGM Grand Inc. operates an entertainment, hotel, and gaming company in Las Vegas. During the mid-1990s, MGM Grand owned and operated the MGM Grand Hotel, Casino & Theme Park in Las Vegas, which ranked as the largest hotel and the largest casino in the world when it opened its doors in late 1993. In addition to the company’s $1.1 billion entertainment complex in Las Vegas, it also operated a MGM Grand hotel and casino in Darwin, Australia and held a 50 percent stake in Las Vegas-based New York-New York, a 2,035-room hotel and casino slated to open in the winter of 1996/1997.
The formation of MGM Grand Inc. in 1986 marked the rebirth of sorts of the hotel and casino operations that at one time were part of entertainment giant Metro-Goldwyn-Mayer. The hotel and casino operations became a separate entity in 1980 when Kirk Kerkorian orchestrated the breakup of Metro-Goldwyn-Mayer into two distinct companies: Metro-Goldwyn-Mayer Film Co. and MGM Grand Hotels Inc. Kerkorian, a self-made millionaire who first made his fortune trading war surplus airplanes during the 1950s, was in his early 60s when he divided Metro-Goldwyn-Mayer in two, having earned vast wealth and a renowned reputation as a savvy financier during his three decades in the business spotlight. In the years following the 1980 split of Metro-Goldwyn-Mayer, Kerkorian would continue to command considerable attention in the financial community, his clout left undiminished by the breakup of one of the film industry’s oldest and largest conglomerates. Kerkorian, after the 1980 division of Metro-Goldwyn-Mayer, owned 47 percent of Metro-Goldwyn-Mayer Film Co. (later MGM/UA Entertainment) and more than 50 percent of MGM Grand Hotel Inc. With sizable stakes in each of these companies, Kerkorian continued to hold sway in the entertainment industry during the 1980s. Of particular interest, however, was his stewardship over the hotel and casino operations that half a decade later became MGM Grand Inc.
The first year of MGM Grand Hotel Inc.’s existence as a separate corporate entity also marked the year a fire swept through the company’s Las Vegas hotel and casino. Aside from the property damage caused by the fire, the November 1980 blaze mired the company in legal difficulties that portended its possible collapse. A proposed $200 million facility in Atlantic City, New Jersey was aborted as a result of the fire, but the most damaging aftereffect of the fire was the $1 billion in lawsuits the company faced nearly a year after the fire had been extinguished. This massive sum crippled Kerkorian’s ambitious plans for expansion. Investors were wary of funneling their cash into an enterprise awaiting the drop of a gavel that could summarily wipe away their investments. For years, the specter of the November 1980 fire hobbled MGM Grand Hotel Inc.’s financial capability to expand, giving the company little chance to execute what Kerkorian had in mind.
Despite the unfortunate effect of the 1980 fire on the fortunes of MGM Grand Hotel Inc., Kerkorian increased his ownership stake in the company in 1984, purchasing enough shares to give him nearly an 80 percent interest in the company. A year after Kerkorian upped his ante in MGM Grands Hotel Inc., the company entered into negotiations with Bally Manufacturing, operator of Bally’s Park Place, one of the most profitable casinos in Atlantic City. By December 1985, an agreement was reached between the two companies for the sale of MGM Grand Hotel Inc.’s two hotels and casinos in Las Vegas and Reno to Bally Manufacturing for $440 million. Under the terms of the purchase, which was completed in early January 1986, Bally Manufacturing assumed ownership of the two properties, renaming them“Bally Grand,” and Kerkorian, the majority shareholder of MGM Grand Hotel Inc., was granted the exclusive rights to the MGM Grand name and logo, to be used in whatever future hotel and casino operations he chose to undertake. Kerkorian did not wait long to put the exclusive rights to the MGM name and logo to use. Shortly after the Las Vegas and Reno properties were sold to Bally Manufacturing, Kerkorian embarked on the development of a new but similarly named enterprise: MGM Grand Inc.
1986: The “New” MGM Grand Is Formed
MGM Grand Inc. was incorporated on January 28, 1986, a company with a highly marketable name but with little else to attract the attention of investors or customers. A year after its formation, MGM Grand moved in a direction different from that of its predecessor organization by launching an airline service that offered luxury flights between New York and Los Angeles. The following year, in 1988, the company moved into a more familiar arena when it purchased the Desert Inn Hotel and Casino in Las Vegas, 48 acres of adjacent undeveloped property, and the Sands Hotel and Casino from Summa Corporation, Hughes Properties, Inc., and Howard Hughes Properties, Ltd. for $167 million. With this foundation in the hotel and casino business, Kerkorian embarked on a path that would establish MGM Grand as a high-profile giant in the Las Vegas hotel and casino business and lead to the creation of a new breed of entertainment facilities in the country’s gambling mecca.
In 1989, the first signs of Kerkorian’s bold and ambitious plans became evident when MGM Grand announced its intentions to build a movie theme park and new hotel in Las Vegas. At the time, the project was to include a massive 4,000-room hotel and an expansive casino—the financial backbone of the complex—but the unique component of the company’s project was the theme park. Hollywood-style studio theme parks were on their way to becoming the rage of the day in certain areas of the country, as entertainment companies concentrated their efforts on attracting families. Prior to MGM Grand’s announcement that it planned to build a theme park in Las Vegas, Walt Disney Co. and MCA Inc. had each committed more than $1 billion to similar attractions in central Florida, pledging themselves to large-scale, family-oriented complexes. Although MGM Grand embraced the theme park concept perhaps more fully than others, the company was not alone in its attempt to attract families through the establishment of theme parks. Other Las Vegas hotel and casino operators followed suit, creating a movement that the Los Angeles Times would later refer to as the “Disney-fication of Las Vegas.” For Kerkorian and the MGM Grand management team that carried out his orders, bringing the proposed project to fruition would take years, as the idea of the complex crystallized and construction began.
As the company entered the 1990s, the Las Vegas project began to take shape, evolving from an idea on paper into reality. In January 1990, when the project was being heralded by company officials as “the largest hotel complex in the world,” MGM Grand acquired the Marina Hotel & Casino, the proposed site for the hotel and casino that was expected to be completed in 1992. The following month the company acquired the 113-acre Tropi-cana Hotel Golf Course in Las Vegas as the site for its theme park, which together with the adjoining hotel and casino represented a $700 million project. In May 1991, while the company’s business was being generated by its operation of MGM Grand Air and the Desert Inn and the MGM Marina Hotel, MGM Grand further refined the details of its Las Vegas project. The complex by this point was expected to cost $910 million and consist of a 5,011-room hotel and a 35-acre theme park based on the Wizard of Oz books and movie, with construction expected to break ground by the end of the summer of 1991.
1993 Grand Opening
In July 1992, MGM Grand moved its headquarters from Beverly Hills to Las Vegas to position management closer to the construction of what by this point was being referred to as the MGM Grand Hotel and Theme Park. The official name of the complex would eventually become the MGM Grand Hotel, Casino & Theme Park, a $1.1 billion project situated on a 112-acre site deep in the heart of the Las Vegas strip. The complex opened in December 1993, amid the fanfare one would expect for the completion of what stood as the premier hotel-casino-theme-park in Las Vegas. The 33-acre theme park, which was operated by MGM Grand Adventures, included eight separate themed areas based on the Wizard of Oz, seven amusement rides, five theaters, three arcades, and a host of restaurants and retail shops. The casino, featuring standard table games such as blackjack, craps, poker, and baccarat, measured 171,500 square feet and was not only the largest casino in Las Vegas but the largest in the world. The hotel was not to be outdone by the stature of the casino. With more than 5,000 rooms, the hotel also ranked as the largest in the world, featuring 751 luxury suites, 52 of which were two stories in height and included internal elevators, formal dining rooms, and dual master bathrooms, each with their own hot tub.
The MGM Grand Hotel, Casino & Theme Park represented a project of unprecedented scale. Aside from the sheer size of the complex, the sprawling Las Vegas structure was adorned with trappings to attract every type of customer. The entrance to the complex was dominated by a seven-story lion. Inside, a 75-foot-tall reproduction of the Wizard of Oz’s Emerald City created an eye-catching, fantasy land. Nearby, the theme park, with its lights, rides, arcades, restaurants, and shops, served as a welcome diversion for those not drawn to the ranks of gaming tables inside the casino.
We consistently provide the premier entertainment experience while maximizing value and opportunity for our guests, Cast Members, business partners and shareholders.
During its first year of operation, the MGM Grand Hotel, Casino & Theme Park generated $742 million in revenues and posted a heartening $75 million in earnings, drawing more than 60,000 visitors per day. While the Las Vegas property was working its way toward recording its inaugural financial figures, Kerkorian led MGM Grand in other directions and into other projects. In August 1994, the company announced plans to build two multimillion dollar resort-casinos in the People’s Republic of China, a first for the country. Expected to be established on Hainan Island in the South China Sea, the resort-casinos were anticipated to become popular vacation havens for all of Asia. A month after the announcement of the proposed projects in China, MGM Grand formed a joint venture with Primadonna Resorts Inc. to build and manage a resort in Las Vegas to be called New York-New York. The $300 million project, which was slated to begin construction in late 1994 on an 18-acre site across the street from the MGM Grand Hotel, Casino & Theme Park, was designed with many of the same components as its much larger, future neighbor. New York-New York, as plans were being formulated during late 1994, was to include 1,500 rooms, a casino, a theme park, and a recreation of the New York city skyline.
Profitability Declines in the Mid-1990s
In early 1995, MGM Grand followed up on its announcements to expand by moving in the reverse direction. In January the company sold its MGM Grand Air subsidiary, which had been providing scheduled and charted air service between Los Angeles and New York, to a cargo airliner named American International Airways. On the heels of this divestiture, the luster of the MGM Grand Hotel, Casino & Theme Park began to fade. The most pressing problem with the complex was the $110 million theme park operated by MGM Grand Adventures. The theme park was “sometimes eerily empty,” as one Wall Street Journal reporter noted during a visit, and its attendance figures had not been bolstered significantly by a reduction in its 1994 admission price of $25 to $15 by 1995. Regarding the floundering state of its MGM Grand Adventures subsidiary, MGM Grand’s management was remarkably candid, quickly realizing its errors. The company’s chief operating officer, Alex Yemenidijian, confided to a Wall Street Journal reporter, “We did not understand the theme-park business. ... For us to succeed in that segment, we need to joint venture with the pros, those who have made the mistakes there are to make and learned what there is to learn.”
While the company talked with major entertainment companies during the first half of 1995 about revamping its theme park, deeper problems with the Las Vegas complex had to be addressed. Once the rush and excitement created by the opening of the MGM Grand Hotel, Casino & Theme Park had ended, the complex’s business began to wane. Midway through 1995, the company was projecting $725 in sales from the Las Vegas hotel-casino-theme park operation, down slightly from the first year’s total, and earnings were expected to suffer a more precipitous drop, falling to $24 million from the $75 million earned the previous year. The drop in earnings pointed to MGM Grand’s most glaring weakness: profitability. Other large-scale Las Vegas hotel and casino operators were enjoying net margins that ranged between 9.7 percent and nearly 13 percent, but MGM Grand was recording a paltry 3.3 percent during 1995. The company’s anemic profitability prompted Kerkorian to take action, which he did in the summer of 1995.
After MGM Grand’s president and chief executive officer Robert Maxey resigned in mid-1995, Kerkorian replaced him with 52-year-old J. Terrence Lanni, president of Caesars World from April 1981 to February 1995. The task facing Lanni, who was named chairman and chief executive officer, and Yemenidijian, who had been promoted to president, was to increase MGM Grand’s profitability. Lanni welcomed this challenge, telling a Forbes reporter, “It’s not very exciting to go somewhere that has great margins already.” To increase the company’s profitability, Lanni endeavored to attract higher-stake gamblers, hoping to bring in customers who would lay down their money in the casino rather than merely tour through the complex and exit without spending substantial sums of money. Aside from accomplishing this objective, Lanni had other ideas in mind as MGM Grand moved past 1995 and into its tenth year of business. Lanni announced plans to establish a sound stage in front of several restaurants within the complex and to erect a recreation of Hollywood Boulevard, as well as to create a“Sidewalk of the Stars” to commemorate high-rollers at the company’s casino.
Expansion Plans for the Mid-1990s and Beyond
As MGM Grand entered 1996, Lanni was searching for an experienced joint venture partner to manage the company’s struggling theme park. Despite the problems with the theme park and the poor profitability of the MGM Grand Hotel, Casino & Theme Park as a whole, however, the company’s tenth year of business was highlighted by several announcements that set the stage for expansion during the late 1990s. In early July 1996, the company announced it had entered into an agreement with Forest City Ratner Companies to develop 30 acres of land on the Atlantic City, New Jersey boardwalk. Several weeks later, the company received a Statement of Compliance from the New Jersey Casino Control Commission that completed the first step in the licensing process toward MGM Grand’s plans to establish its Atlantic City resort. Describing the company’s plans for its Atlantic City project, Yemenidijian declared, “We intend to invest in excess of $700 million to develop a majestic destination resort that will be the pride of Atlantic City, and we will complete it as quickly as the entitlement process will allow us.”
As the Atlantic City project was getting under way in July, the company also announced it had reached an agreement to act as the exclusive project developer and manager for Tsogo Sun Gaming & Entertainment, which planned to apply for a minimum of 15 casino gaming licenses in the Republic of South Africa. The execution of the company’s two new development projects in Atlantic City and South Africa highlighted its expansion plans as MGM Grand moved toward the late 1990s, with New York-New York, the 2,035-room hotel and casino jointly developed with Primadonna Resorts, scheduled to open in Las Vegas during the winter of 1996/1997.
MGM Grand Hotel Inc.; MGM Grand Hotel Finance Corp.
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—Jeffrey L. Covell