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MGM Mirage to expand through franchising

MGM Mirage’s CityCenter is under construction in this May 5 file photo. MGM Mirage, struggling with large debt, has made 10 new deals to manage hotels abroad without spending on land or development. AP Photo by Jae C. Hong

MGM Mirage’s CityCenter is under construction in this May 5 file photo. MGM Mirage, struggling with large debt, has made 10 new deals to manage hotels abroad without spending on land or development. AP Photo by Jae C. Hong

Oskar Garcia
AP Writer

Las Vegas — Struggling with an economy that has gouged gambling profits and cut casino companies’ ability to borrow, MGM Mirage hopes to keep expanding its international hotel and casino empire and fattening its profit — but have other companies foot the bill.

Under 10 new deals, the largest owner and operator on the Las Vegas Strip will manage hotels abroad without spending on land or development, part of its overall effort to cut costs and risk. Several of the hotels will carry the names of the company’s Bellagio and MGM Grand casinos in Las Vegas.

Most hoteliers use franchising and management contracts to generate revenue at lower risk and cost. But MGM Mirage’s deals to brand and manage hotels built by others are a notable first for the casino operator partly controlled by billionaire investor Kirk Kerkorian. They may be the company’s only option for expansion as it continues to struggle with massive debt, which it reported at $12.36 billion as of June 30.

Major casino companies have typically grown by buying or building properties they also operate, like the $8.5 billion CityCenter project MGM Mirage is building in Las Vegas, which it plans to manage. The 67-acre-project, co-owned by Dubai World, starts opening in December.

“You are not going to see anytime soon these big, massive investments in brick-and-mortars in our industry, at least in the gaming industry,” Gamal Aziz, who leads MGM Mirage Hospitality, the subsidiary in charge of the 10 contracts, told The Associated Press. “So how do you execute on your growth strategy?”

MGM Mirage’s answer is management and franchise deals, which Aziz said the company began considering two years ago. In most cases, the new deals do not include casinos and provide MGM Mirage 2 percent to 3 percent of gross sales plus up to 10 percent more if a property achieves profit goals, Aziz said.

They are an attempt to build revenue rather than grow by adding assets.

MGM Mirage is betting its branded resorts will attract visitors even without gambling, which now produces just more than one-third of MGM Mirage’s revenue.

MGM Mirage lost $855 million in 2008, compared with a profit of $1.58 billion in 2007. And business remains slow: It lost $212.6 million during the second quarter of 2009, compared with profit of $113.1 million in the same quarter a year earlier.

“It’s going to be interesting to see if you can start with one property in a major gaming destination and then roll that out as a ‘regular’ hotel across the world,” said Jan Freitag, vice president of global development for Smith Travel Research Inc.

Freitag said hoteliers are increasingly leaving property ownership to investment trusts, and the terms of MGM Mirage’s deals are similar to those hotel companies reach.

“In that vein, what MGM Mirage is trying to accomplish — to get to a more franchise-driven model — is very much along the lines of what the market is rewarding today,” he said.

Two of the deals will put new MGM Grand casino resorts in Ho Tram, Vietnam, and Sharm el-Sheikh, Egypt.

The nongambling deals include residential units and Bellagio, MGM Grand and Skyloft hotels in Abu Dhabi and Dubai, in the United Arab Emirates. Other Bellagios are planned for Cairo, Egypt, and Mumbai, India, while four hotels are planned in China.

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