It happened just as Carl Icahn wanted. Eldorado bought Caesars and is bringing the company formerly called Harrah’s back to where its life began. The merger was not unexpected. Still, on Monday, June 24th, when the announcement came it pushed all other gaming stories off the front page, even the opening of $2.6 billion Wynn Resorts’ Encore near Boston. The agreement between Eldorado and Caesars is a cash and stock deal worth $17.3 billion inclusive of Caesars’ debt. There is a side-deal wherein VICI, a REIT, will acquire some of the real estate for $3.2 billion and lease the operations back to the new company, to be called Caesars. The board of directors of Caesars, Eldorado and VICI have approved the deal and now the stockholders get to vote. The deal is then subject to regulatory. The approvals and final change of ownership should occur sometime in 2020.
The story of the sale has many layers. The most significant part of the story concerns Carl Icahn and activist stockholders. The sale of Caesars was the brainchild of Carl Icahn. Beginning in December, Icahn increased his holding in Caesars to 99 million shares and with 28 percent of the stock, he is by far the largest stockholder. Icahn criticized the management of Caesars for failing to maximize the value of its assets. He demanded and received three seats on the board of directors and a voice in choosing a new CEO. Tony Rodio, who had previously been CEO for Icahn-owned Tropicana, became CEO. With control of the company, Icahn forced it to be put on the market. The final price would give Icahn a nearly $500 million profit if he decides to sell his shares. Wall Street observers are betting he will hold on to his stock until the price goes up again as a result of the Eldorado management’s improvements to operating income.
The transaction could never have occurred without the involvement of a REIT. Caesars was just too big and expensive for one operator to finance. Although, MGM and Las Vegas Sands might have been able to find the financing, neither showed any interest. Tillman Fertitta was another early bidder. Fertitta owns the Golden Nugget casinos and Landry’s put forth a bid last November, but Caesar was not interested at his price. And after Icahn increased his position, he said the Fertitta bid was simply too low. After the Eldorado announcement was made, Fertitta expressed interest in the Strip properties. Phil Ruffin also expressed an interest in purchasing a couple of the assets, but not the entire company. Boyd was also said to have considered a bid, but in the end did not; Boyd might still be interested in a Strip property.
The only viable candidate appeared to be Eldorado with at least one major REIT as a partner. Besides having a partner, Eldorado also has a strategy for selling some of its underperforming assets. The New York Post speculated that Bally’s Atlantic City will be closed, and the New Jersey Gaming Control Board may force the sale of at least one other casino, claiming the Eldorado would own too many of the city’s casinos. Some of the Midwestern casinos will be put up for sale either forced by the regulators or to reduce the company’s exposure in any one market. However, the hot properties to sell will be on the Las Vegas Strip. Already, Fertitta, Ruffin and Boyd are wondering which properties might be put on the auction block.
The deepest layer of the story is Eldorado’s strategy of acquisitions that focuses on synergies, reduced marketing costs and debt reduction by selling the physical assets to a REIT. Eldorado has not been able to increase revenue at the casinos it purchases in any significant way. But it has been very successful at increasing cash flow by reducing expenses. The most important reduction comes from synergies. Eldorado estimates there will be $500 million in savings due to synergies in the merger with Caesars. The new larger company can also purchase many products and services cheaper than the separate companies could; slot machines, insurance and borrowed capital can all be purchased at better prices.
The analysts looking at the Caesars transactions praised Eldorado management for its skill in reducing expenses and increasing cash flow. However, there will be an additional challenge for Eldorado; Caesars has been struggling under debt and bankruptcy since 2008. As a consequence, many of its properties are sorely in need of investment. Some of the casinos most in need of help will probably be offered for sale at bargain prices, the rest will need attention. The deferred maintenance in some of the older properties is in the hundreds of millions of dollars. Many of those properties are also sadly out of date with their in-market competitors and will need significant upgrades to compete.
The local media where there is Eldorado or Caesars property has been speculating about the impact of the transaction on their community. The most interesting for me is Reno. The local media in Reno is considering the fate of Caesars Harrah’s and speculating on what it will mean for the downtown casino core. The media is also wondering if there were any other examples of small family companies becoming industry giants. The answer is yes. For example, Walmart started with one store operated by Sam Walton and his family. In Reno, the answer is a double yes; in 1973 when Don Carano and partners opened the Eldorado, Bill Harrah operated Harrah’s just two blocks down the street. On that day Harrah’s and Eldorado were just small family owned Reno casinos. On the day of the merger, the former Harrah’s and Eldorado will become the nation’s largest gaming company. And the headquarters will be in downtown Reno. It was a journey for those two companies on Virginia Street in 1973 to those same two companies in 2020.
