You wouldn’t expect this to be the perfect time to create the world’s biggest casino operator, but then again, billionaire investor Carl Icahn has always had an out-of-the-box approach to business. He was the principal driving force behind Eldorado Resorts’ $17.3 billion buyout of Caesars Entertainment (NASDAQ:CZR), a hugely ambitious deal considering the circumstances. But Icahn and other stakeholders are taking a long-term view, and that is why CZR stock will soar higher.
The novel coronavirus will eventually disappear after a vaccine is commercially available. We have seen the enthusiasm gamblers expressed when casinos reopened in June. If that is anything to go by, there is a lot of pent-up demand that will come out when things normalize.
With a regional footprint of 60 properties in 16 states, the combined entity will be a gaming juggernaut. It merits a place in any portfolio based upon its size.
The Deal Will Lead to Strategic Improvements
It’s understandable that most investors would be squeamish parking capital in the casino space at this point. Even though the deal is expected to result in $500 million of synergies, when that will happen is still sketchy, since we are not in the post-virus era yet.
However, savvy investors will note the deal comes with additional caveats that will have a long-term impact on how things are run. For instance, as a result of the merger, members of ERI management will now occupy seats on Caesars’ board — a move that will have a tremendous impact on the culture of the shared entity.
Both organizations have capable management that has steered the companies ably. But combining the experiences of the two entities will be vital in unlocking the synergies discussed earlier and driving up CZR stock.
Legalization of Sports Betting Will Push CZR Stock Higher
As I discussed in my piece on DraftKings (NASDAQ:DKNG), the U.S. is inching toward the legalization of sports betting. Despite slow progress, it’s more than likely states will hasten the process to bring in additional income and employment.
In that case, the newly formed entity will have much to gain since it already has established relationships with sports betting partners. Although it will be a slow-burn process, the legalization of sports betting presents many opportunities.
Although everyone is hopeful for a coronavirus vaccine in the fall, it is unclear when we will have enough medicine to vaccinate the entire U.S. population. That means we do not have a definite timeline when things will get back to normal.
There was hope that the warm weather would bring about some relief from the coronavirus. However, that has not proved to be wholly correct. What’s more important is that in the fall, we could see Covid-19 surging once again. In such a scenario, states will close down once again.
The new Caesars Entertainment has a large concentration of assets on the Las Vegas strip. If there is a large-scale closure, the company will stand to lose a significant chunk of revenue with the closing of just one city. But the bright spot here is that the combination has resulted in some geographic diversification. Covid-19 has had a larger impact on the business of Las Vegas as opposed to smaller centers. In this situation, every company will want to protect itself from becoming concentrated in one state. Fortunately, the deal will diversify the combined entity’s portfolio.
The combined entity will also need to keep an eye on debt, which stands at more than $13 billion after the merger. With revenues likely to remain stressed for the foreseeable future, the debt load will weigh heavily on results for quite some time. Ultimately, that will also have an effect on CZR stock prices.
My Last Word on CZR Stock
There is no escaping the fact that the merger has created a gambling juggernaut, the likes of which have never been seen before. The deal may seem pricey considering Covid-19, but Carl Icahn is seeing the long-term picture here.
I suggest that investors do the same and buy CZR stock at a discounted rate. Casino operators are facing headwinds, but these will last a few quarters. Fundamentally, the merger has created a giant casino operator. The new-and-improved Caesars Entertainment will be a regional powerhouse once the dust settles on Covid-19.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.