Eldorado Resorts, a regional casino operator, has acquired Caesars Entertainment (NASDAQ:CZR), one of the largest Las Vegas operators, in a $17.8 billion deal. CZR stock opened this morning at $37.47 a share.
The minnow has officially swallowed the whale.
Caesar’s the company uses the name of its iconic Las Vegas strip casino, but it was much more. Harrah’s was Caesar’s. Bally’s was Caesar’s. Even Horseshoe was Caesar’s.
This is the second time Caesar’s has been acquired where the acquirer has taken its name. It happened when Harrah’s bought the company in 2005. That deal was followed almost 10 years later by the bankruptcy of Caesar’s casinos.
The latest deal was engineered by investor Carl Icahn, who had 28.5% of the old Caesar’s and will have 10% of the new company. It makes CEO Thomas Reeg, who built Eldorado out of Reno, the new King of Las Vegas.
But how will CZR stock investors do?
CZR Stock Debt
How well the new company does will depend on how long debt remains cheap and how fast the economy reopens.
Eldorado was barely one-quarter the size of Caesar’s. It raised $6.6 billion of the cash needed for the deal at an average interest rate of 6.77%. It also sold $722 million of stock and took on Caesar’s existing $9.7 billion in debt. The company now has about $23.4 billion of tangible assets burdened by $19.3 billion of debt.
Before COVID-19 there was plenty of cash to pay those debts. In an ordinary year, the combined company has $11.3 billion of revenue to work with, and $620 million of operating cash flow. But 2020 is not an ordinary year. Still, Eldorado was motivated to get it done now because the cash cost of the deal was rising every day, as our Mark Hake wrote recently.
The new company will operate 55 casino properties in the U.S. and another 12 internationally, under the name London Club. Reeg sold small casinos in Vicksburg, Miss. and Kansas City at the insistence of regulators. He will have to sell at least one of those Las Vegas properties post-merger. The most likely buyer is Twin River Worldwide Holdings (NYSE:TRWH), a Rhode Island-based operator whose controlling shareholder is the Standard General hedge fund.
The Gamble
Reeg and the regulators who signed off on the deal, are betting that the U.S. gambling market bounces back quickly. That return will be slowed by COVID-19, but so far investors are looking past the virus. The new Caesar’s opens for trade July 23 at about $38.25 per share. That’s a market cap of $16.15 billion.
In the short run, the Eldorado portion of the company is doing better than the Caesar’s side. Reeg’s preliminary figures for May show them getting 9-11% more business than a year earlier, while properties in Las Vegas were down over 40%. Most Las Vegas visitors fly in, while those who go to the regional casinos drive.
The combined companies had over 80,000 employees before COVID-19 and about 55% have been called back so far. CFO Brad Yunker has admitted that layoffs will follow completion of the merger.
The Bottom Line
The clock is already ticking on Eldorado’s debt payments and it has taken a huge gamble. The Las Vegas properties depend not just on the city re-opening, but on airlines as well. Even if everything opens, there’s also the economy to worry about. That took a huge hit from COVID-19, one that will linger.
This deal was a stretch when it was announced a year ago. Now it’s a put on the virus, a bet that the 2019 economy will return in 2021.
I’m not willing to make that bet. But if you are and you’re right, you’ll win. If not there’s always bankruptcy court.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
