One Wall Street gaming analyst raised key questions over the acquisition of Caesars by Fertitta Entertainment, while another suggested the casino industry is “ripe” for leveraged and management buyouts.
Daniel Politzer with J.P. Morgan sent a note to investors highlighting the deal announced Thursday.
“For better or worse, one fewer publicly traded Las Vegas Strip resort operator could result in increased crowding in MGM, which is good if Las Vegas is improving, as public equity investors will have one fewer proxy to express their Strip views,” Politzer said. “(In addition), for any regional gaming acquirer, the potential for forced divestitures could provide attractive acquisition opportunities.”
John DeCree, director of equity research at CBRE, said the domestic casino industry is ripe for activity. If the Caesars-Fertitta deal goes through, it will be the second major take-private transaction in the sector in the past year following Golden Entertainment going private this year.
“We believe the casino sector is ripe for additional leveraged and management buyout activity, given the strong free cash flow generation, proven revenue durability, depressed public valuations, and reasonable interest rate environment,” DeCree said. “(There are) several potential take-private candidates, including Accel Entertainment, MGM, Penn, Melco Resorts, and Entain.”
Politzer wondered whether there will be a competing bid, though he’s not expecting one, and where Caesars shareholder Carl Icahn might “shake out in all this.” He asked if shareholders would accept $31 and what happened to the prior $32 to $34 a share as reported by the Wall Street Journal and CNBC.
“Why was there no financing contingency and is that a risk?” Politzer asked. “What assets could be sold and who are the likely buyers? What will Tilman do with the digital business, given he opportunistically sold Golden Nugget Online Gaming to DraftKings? How might Fertitta manage Caesars differently, and how could this transaction impact the competitive environment on the Las Vegas Strip and in regional markets? And what will Fertitta do with the $1.3 billion of Wynn (Resorts shares) that he owns?”
As for the disposition of properties that overlap in Lake Tahoe, Lake Charles, Atlantic City, Biloxi, Laughlin, and Las Vegas, “We believe that all of the Golden Nugget casinos are wholly owned, but many of Caesars’s casinos in overlapping markets are leased, thus are more difficult and less lucrative to sell and potentially costly to break a master lease,” Politzer said. “We think potential wholly owned divestitures could net $2.3 billion in proceeds, and include Circus Circus Reno, Eldorado Reno, Horseshoe Lake Charles, Golden Nugget AC, and/or a property in Las Vegas (e.g., Flamingo, Golden Nugget).”
DeCree believes there are few if any anti-trust concerns.
“Lake Charles and Tahoe would be the two potential markets where there could be an issue, but we think the risk is minimal and don’t anticipate any forced asset sales,” DeCree said. “With committed financing, we also see little need for any other substantial divestitures. While a sale/spin off Caesars Digital was a commonly discussed strategic alternative, it appears the take-private transaction is a cleaner path today, particularly amid the recent valuation correction and elevated volatility in online gaming stocks. However, we still see a path for a digital transaction in the future, which could look similar to Fertitta’s prior SPAC (Special Purpose Acquisition Company) and eventual sale of Golden Nugget Online Gaming.”
Politzer said deal synergies are difficult to quantify, given Caesars already runs “very lean” and Fertitta Entertainment is a private company. He noted J.P. Morgan’s math reflects $125 million in total synergies, as they see opportunity on the cost side from lower corporate expenses (duplicative roles, no public company costs), improved food and beverage sourcing, and/or potentially putting Landry’s restaurants in Caesars properties.
“On the revenue side, we think (the new company) could benefit from a larger database and broader hub/spoke network by combining Caesars Rewards, Golden Nugget’s 24 Karat Select Club, and Landry’s Select Club,” Politzer said.
