Since being acquired by Eldorado Resorts for $17.3 billion this summer, Caesars Entertainment (NASDAQ:CZR) has become a hot stock. Since my July 23 story on the combination, CZR stock is up 53%. This despite Eldorado borrowing $6.6 billion for the purchase and taking on $9.7 billion of Caesars debt.
In addition to getting the iconic Las Vegas casino, and taking its name, Eldorado got Bally’s, Harrah’s, and a host of other brands. The deal showed how gambling has become a national business.
Now the stock is hotter because of Caesars’ pending purchase of William Hill, the British bookmaker. The deal lets Hill escape the private equity clutches of Apollo Global Management. It also gives Caesars pole position for the next gambling revolution, namely the internet.
Separate the Real Estate
Caesars’ secret sauce in all this is VICI Properties (NYSE:VICI), a real estate investment trust (REIT) created by Eldorado. Separating casino real estate from operations cuts costs and creates tax-advantaged dividends out of rent.
To satisfy U.S. regulators concerned with the new company’s dominance of the U.S. gaming market, Eldorado and VICI have been dealing all year.
Even before completing the Caesars deal, CEO Thomas Reeg sold casinos in Vicksburg, Shreveport and Kansas City. The buyer was Twin River Worldwide Holdings (NYSE:TRWH), a Rhode Island company backed by Standard General, a hedge fund. A fourth property, at Louisiana Downs near Lake Charles, was sold for $22 million.
Reeg also agreed to sell Harrah’s Reno, once an Eldorado flagship, to Las Vegas developer Chris Beavor’s CAI Investments. The initial price was $50 million, the final price $41.5 million. The property will become apartments and offices.
The money raise is continuing with a $400 million mortgage on the Caesars Forum Conference Center to VICI, a five-year note at 7.7% that VICI can call in three years.
More recently Caesars announced a secondary stock offering, 30 million shares with a value of about $1.70 billion at $56 a share, slightly below the Oct. 5 opening bid. That creates an incentive for underwriters to exercise a 30-day option on 4.65 million more shares at the $56 price, raising another $370 million.
The new stock is being used to buy Hill, a British bookmaker that came to the U.S. to escape a crackdown on its UK betting terminals. The lure was a 2018 Supreme Court decision legalizing sports betting, previously available only in Nevada and New Jersey, in any state which wanted it.
Caesars plans to sell Hill’s non-U.S. assets, which Truist Financial (NYSE:TFC) analysts have estimated is worth between $2 billion and $4.5 billion. At $2 billion, Hill would be barely affordable with the new stock sale. At $4.5 billion, Caesars would have a $800 billion profit and the stock proceeds could be used on other things.
Hill is expected to be Eldorado’s secret sauce going forward. The “digital transformation of a giant” would combine the nationwide network of casinos with online gaming and sports betting.
The strategy got an immediate endorsement from Walt Disney (NYSE:DIS), which will now have William Hill sponsor its fantasy games. A studio has been built in Las Vegas to host daily gambling shows on Disney’s ESPN networks. The book will be run through DraftKings (NASDAQ:DKNG), whose stock is now worth more than twice CZR stock just on the promise of sports betting.
Bottom Line on CZR Stock
Combining its debt and equity, Caesars has an enterprise value of a few billion dollars more than DraftKings. If you believe that online betting is the future, DraftKings is the better bet over CZR stock.
But Caesars is gambling that physical casinos, once they come back, will deliver far more profit than online alone. If you agree with that assessment, you can win by betting big on the stock. Better yet, buy VICI, now yielding 5.6%.
At the time of publication, Dana Blankenhorn held no positions in stocks mentioned in this story.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.