Entering 2020, few gaming names were as ballyhooed as Eldorado Resorts (NASDAQ:ERI) as analysts and investors fawned over the potential cost synergies and free-cash-flow-generating potential of the company’s proposed $17.3 billion takeover of larger competitor Caesars Entertainment (NASDAQ:CZR), but it didn’t turn out to be an immediate boon for Eldorado Resorts Stock.
The stock declined immediately following the announcement of that offer last June with analysts speculating the company was paying too high a price for debt-ridden Caesars. Wall Street eventually came around as shares of the regional gaming company spent most of the third and fourth quarters soaring, propelling the stock into 2020 on a strong note.
From September through its March peak, shares of Eldorado doubled, action that prompted some analysts to speculate a triple-digit price tag could be in the stock’s future.
Then along came the novel coronavirus, a scenario that ultimately led to the temporary closure of every casino in the U.S. (they’re still closed) and one that had investors souring on gaming stocks in short order. In breathtaking fashion – basically the month of March – Eldorado went from flirting with $71 to struggling to stay above $6.
Headwinds Galore for Eldorado Resorts Stock
Eldorado’s Covid-19 exposure isn’t confined to the aforementioned closures that are afflicting the entire industry. The pandemic is serving to expose credit weakness, meaning corporate bond market participants are closely scrutinizing balance sheets.
That means a deal like Eldorado/Caesars where the former is taking on $8.8 billion of the latter’s junk-rated obligations isn’t receiving the enthusiasm it was late last year. Debt markets spoke on the matter earlier this year when reports surfaced that banks that agreed to loan cash to Eldorado to purchase the Caesars Palace operator were having a hard time moving $7 billion in loans.
Those lenders agreed to finance that portion of the deal and needed to move the paper in the corporate bond market, but there wasn’t much appetite for the debt amid the coronavirus calamity, prompting speculation Eldorado’s acquisition was in Jeopardy. Fortunately, those concerns are being allayed amid rumors the transaction will be finalized in June.
“While it’s clear right now both the equity and debt markets are telling us neither believe this deal will get closed, we absolutely disagree and still believe this deal is getting completed,” said Stifel analyst Steven Wieczynski in a recent note.
Here’s where things get interesting with Eldorado Resorts Stock. It’s more than doubled over the past month and nearly tripled off its 52-week low. All that with little visibility regarding when casinos will reopen and even when those venues do open their doors, how long it’ll take for business to get back to usual.
On that note, consensus among gaming analysts is that it’ll take some time for Las Vegas to rebound in the wake of the coronavirus because that’s a destination many gamblers need to fly to and it’s not entirely clear when the airline business is going to bounce back. Conversely, analysts expect regional casinos – ones in regions such as the Midwest and the South – to rebound more rapidly. That’s potentially advantageous for Eldorado because it has its own strong regional network, one that will be bolstered by acquiring Caesars.
Bottom Line on ERI Stock
Although it has more than doubled in a short time frame in what can be considered a treacherous operating environment for casino operators, Eldorado remains one of the more compelling stories in the industry. Of course, that’s assuming the U.S. economy (the combined Eldorado/Caesars won’t have much international exposure) can rebound after Covid-19 eases.
Assuming the company can meet or exceed its stated goal of wringing $500 million in savings from the Caesars deal, bolstering free cash flow in the process, Wall Street could easily renew its enthusiasm for Eldorado. After all, the cost synergies and cash flow were two of the primary reasons the deal was lauded in the first place.
It’s not going to be bump-free ride as all gaming companies remain vulnerable to poor economic data, which has been piling up lately, and it’s unlikely the stock sniffs $70 again soon, but if Eldorado pulls off the Caesars buy and can immediately wring savings out of it, the stock should rally.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
