During the second-quarter earnings call this week, Caesars Entertainment raised the issue of being aggressive in the mergers and acquisitions space in the next year or two, creating some buzz among Wall Street analysts.
Caesars CEO Tom Reeg said that given where the company is in the capital cycle, and the performance of the business, they’re starting to look at what to do with the free cash flow that will be generated in 2024 and 2025.
Eldorado Resorts closed on the $17.3 billion deal acquisition of Caesars in July 2020 and talked about disposing of more assets. In 2022, Caesars was still talking about selling a Strip property before declining to do so.
“I tell you, three years after the Caesars transaction closed, it’s 30-60 days beyond the first time I’m feeling where we can be offensive from an external-opportunity standpoint,” Reeg said. “So it’s been a long road to get through. And the cash-flow machine here is going to accelerate as results continue to improve, digital continues to deliver improving cash flow, and interest expense goes down. Everything that happened with COVID and the merger, we feel strongly about where we sit today.”
In response to a question from Deutsche Bank analyst Carlo Santarelli, Reeg said Caesars is approaching “the end of the capital circle” and they don’t have any “of the chunky projects that we’ve had going since the merger on our plane.” There are some meaningful projects in particular markets, but they’re not the $300 million, $400 million, or $500 million capital outlays, he added.
“So from a balance-sheet and cash-flow perspective, you get to a point where you’re going to be generating a lot of free cash flow and look at what to do with it,” Reeg said. “We as a team have delivered a lot of value over the last decade to stakeholders through external opportunities. Of course, we’re going to look for potential future opportunities now that we’re in a position to tackle those, but don’t read that as a lack of confidence in the growth potential of the existing portfolio.”
Reeg said they were on a run rate of about $4 billion of trailing EBITDA and from returns in digital and brick-and-mortar projects that have or will come online, that will push Caesars toward being a $5 billion company.
As they look at what to do with cash flow in terms of paying down leverage and what that does for shareholder value, Reeg noted that it makes them think about distributing or investing that cash flow. “We’ve got a great track record of putting it to work elsewhere, so we’ll explore that as we move forward.”
When asked to follow up on his comments by Steven Wieczynski, an analyst with Stifel, Reeg declined to go into details. “Maybe I’ll buy Stifel,” he joked.
“You know who’s out there. You know those that are at our size. It’s not as easy to find targets that, A, move the needle and B, are actionable from an antitrust perspective. But there’s not zero targets available out there. And as we get to those free-cash-flow levels, given what we’ve generated in the past in terms of returns, it shouldn’t be surprising to anybody that we’ll look for an opportunity to do that again.”
In his note to investors following the earnings call, Santarelli talked about Reeg’s comments.
“Interestingly, management noted that it would soon be in a position to be more aggressive with respect to external opportunities,” Santarelli wrote. “These comments, as expected, received a lot of attention from the investment community.”
Based on Deutsche Bank’s interpretation, Santarelli said they expect Caesars to be “about 4 x net debt/EBITDA, with discretionary free cash flow for debt reduction expanding in 2024, as cash interest falls and capital expenditure projects roll off.”
Santarelli noted that the current management team has been aggressive in the mergers and acquisition arena for an extended period.
“The landscape, both in Las Vegas and in regional markets, has and is likely to have assets coming for sale at more reasonable valuations in the medium term,” Santarelli said. “We believe management believes there is more value creation in M&A than in capital returns a la buybacks/dividends. We believe any acquisition would likely need to grow the business by, at minimum, 10% on an EBITDAR basis, thereby ruling out smaller operators and assets from the discussion.”
