Analyst says Eldorado-Caesars merger will happen, but casino closures may extend the timeline

March 26, 2020 11:24 AM
  • Howard Stutz, CDC Gaming Reports
March 26, 2020 11:24 AM
  • Howard Stutz, CDC Gaming Reports

It’s the most frequently asked question currently circulating throughout the gaming investment community.

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“Is the $17.3 billion merger between Eldorado Resorts and Caesars Entertainment still alive?”

The COVID-19 coronavirus pandemic shut down the nation’s casinos last week and sent the stock markets to their largest declines since the recession. Eldorado shares lost 91% of their value in the last month, while Caesars fell 78%.

“The stock action has been particularly draconian,” Deutsche Bank gaming analyst Carlo Santarelli told investors in a research report published Tuesday.

Santarelli said too much is being read into the stock market dynamics, which has created a narrative that he believes is wrong.

“This, in turn, has led many to believe the deal isn’t going to come to fruition,” Santarelli said.

He spelled out several reasons why the merger will happen, albeit not in the time frame over the next three months predicted by Eldorado executives.

“We believe it is difficult to expect the transaction to close while the casinos remain closed,” Santarelli said of the shutdowns, which could extend well into April.

Carlo Santarelli Deutsche Bank

The analyst said bank financing for the merger was committed “and we don’t see the banks backing away.” Liquidity, he said, is also not an issue. Eldorado drew down more than $480 million from its credit facility last week to boost its balance sheet since revenue and cash flows are currently at zero.

Meanwhile, Eldorado would be forced to pay Caesars an $836 million breakup fee if the deal were to fall through. Santarelli said the break-up fee’s presence “is likely the biggest motivating factor to move forward with the transaction and a key reason why we believe that is likely what Eldorado will do.”

The deal, the largest ever in the casino industry, will create a company with a footprint of roughly 60 properties in 18 states. Eldorado is the acquiring company; its management will control the merged operation out of its corporate offices in Reno, Nevada.

Seven state regulatory agencies have approved the merger and several casino transactions are pending that would alleviate any federal antitrust issues. However, the Federal Trade Commission has yet to formally sign off on the transaction.

Regulators in three of the most important gaming states, Indiana, Nevada and New Jersey, have yet to rule on the transaction, Santarelli said.

In an email Wednesday, Nevada Gaming Control Board Chairwoman Sandra Douglass Morgan said the agenda for April’s monthly hearing was still being finalized, “but I do not believe (the Eldorado-Caesars merger) will be scheduled on our regularly scheduled April agenda.”

Under the terms of the merger agreement, announced last June, Eldorado will pay $8.40 per share in cash and 0.0899 shares of Eldorado stock for each Caesars share, or $12.75 per share. The combined business will be called Caesars, and its shares will be traded on the Nasdaq.

Shares of Eldorado Wednesday closed at $16.69, up $1.64 or 10.90%. Caesars shares closed at $7.13, up 95 cents or 15.37%. Both companies are traded on the Nasdaq.

Real estate investment trust VICI Properties is playing a part in the transaction.

In January, the company raised $2.5 billion to fund its purchase of three Caesars properties under the Harrah’s brand in Atlantic City, Laughlin, Nevada and New Orleans for a combined $1.8 billion. VICI will lease the operations back to Eldorado for a total annual rent of $154 million once the deal closes.

SunTrust Bank gaming analyst Barry Jonas conducted an investor conference call with VICI management Wednesday, who reiterated a belief that the deal is on track.

In a note to investors, Jonas said VICI also noted the FTC “was working through (a) final review.” Jonas also told investors VICI had prefunded its part of the transaction.

“This is consistent with our view on deal-closing probability,” Jonas said.

Earlier this month, Eldorado agreed to sell its management stake in the Montbleu Resort in Lake Tahoe to Las Vegas-based Maverick Gaming for an undisclosed price. In January, Eldorado agreed to sell the Eldorado Shreveport in Louisiana to Maverick for $230 million.

Both deals are expected to close in the second half of the year and would remove the anti-trust issues hanging over the deal.

Eldorado also has a deal in place to sell Isle of Capri Kansas City in Missouri and Lady Luck Vicksburg in Mississippi for $230 million to Twin River Worldwide Holdings, a transaction expected to close in the second half of the year.

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at Follow @howardstutz on Twitter.