Eldorado Resorts (NASDAQ:ERI) stock will likely move higher as soon as its cash and stock deal to merge with Caesar’s Entertainment (NASDAQ:CZR) closes. The deal looks like it will close by late July.
One reason that is good news is that the cash portion of the deal rises each month that it does not close after March 25. For example, Eldorado Resorts has said that as of May 31 the cash and stock formula adds up to $7.4 billion in cash paid to CZR stock shareholders and 77 million shares.
But I estimate that this dollar amount is over $205 million more than it would have cost Eldorado Resorts if the deal had closed on March 25. And each month the cost is rising. So Eldorado Resorts stock will benefit once the deal closes. Here is why:
Why Eldorado Resorts Will Pay More Cash
Eldorado Resorts provides the algebra of its takeover formula on page S-12 of its recent Prospectus Supplement dated June 15. There it says there that as of May 31, the total number of shares to be issued to Caesars Entertainment shareholders is 77 million.
But the Eldorado shares issued are equal to 8.99% of the “Aggregate Caesars Share Amount.” So, we can estimate the Aggregate Caesars Share Amount is 77 million divided by .0899. That works out 856.5 million Caesars shares.
Now we can estimate how much the cash portion will cost Eldorado Resorts. Eldorado made the cash portion of the deal for Caesars Entertainment shareholders equal to $8.40 per CZR share – as long as the deal closed by March 25. So $8.40 per CZR share times 856.5 million Caesars shares is equal to $7.1496 billion.
However, that is much lower than that what Eldorado Resorts says it will cost on page S-12 of the prospectus. There the company says that as of May 31, the cash portion cost will be “approximately $7.4 billion.” That means that 68 days after the March 25 deadline in the cash formula has already cost Eldorado Resorts $205.4 million (i.e., $7.4 billion less $7.1496 billion).
The Cash Cost Is Piling Up
Why? Well, the formula cited on page S-12 says that every day after March 24 the cash cost rises. If it does not close by then Eldorado has to pay CZR one-third of one cent per share more. This is on top of the $8.40 per share already payable to CZR shareholders.
So over 68 days (i.e., March 25 to May 31), the extra cost is 22.6644 cents per share (0.3333 cents per share times 68 days). That implies that the total shares used in this calculation are 904.5 million shares of Ceasears (i.e, $204.5 million divided by 22.6644 cents per share). This includes extra shares issued to convertible noteholders and option holders.
Therefore, every day the deal does not close the cash cost is rising by $3.015 million. Every 30 days the cost rises by $90.44 million. Every quarter the cost is $274.3 million more.
Eldorado Resorts Stock Should Benefit
You can see that Eldorado Resorts stock will benefit from a sooner than later closing. If the deal does not close until July 31, for example, the extra cost will be 61 more days past May 31. That is the date when Eldorado Resorts says on page S-12 the deal will cost $7.4 billion.
This brings the total extra cost to 20.3313 cents per share more (i.e., 61 days times 0.3333 cents per share). Using the 904.5 million share count for CZR stock, the extra cost tallies to $183.89 million by July 31. In other words, the cash portion will be $7.5839 billion.
Here is another way to understand this. By July 31, Eldorado Resorts will pay to every CZR shareholder $8.83 per share. This is 43 cents higher than than the $8.40 per share up until March 25.
Eldorado Resorts Stock Will Rise After the Merger Closes
Wall Street hates uncertainty. The complicated merger formula has caused a lot of uncertainty for the total cost.
However, it appears that Eldorado Resorts has recently raised enough debt and equity to pay the estimated $7.58 billion. For example, the company recently sold 20.7 million shares at $39 per share. This worked out to $773 million for Eldorado Resorts, after the dealer costs and discount, as shown on page S-41 of the prospectus.
On Friday, June 19, the company raised $6.2 billion from three notes for the cash costs of the merger. So the equity raised and the debt raised is $6.973 billion. That leaves about $611 million that it must finance internally through its own cash and cash flow. As of March 31, the company had $710 million.
Here is the bottom line. The costs to close its merger rises every day, so Eldorado Resorts stock will rise once the deal closes.