Wall Street is engaging in some Las Vegas-style handicapping to predict which gaming companies are likely targets of a managed or leveraged buy in the wake of Fertitta Entertainment’s offer for Caesars Entertainment.
Fertitta’s offer from last week would take Caesars private. The proposed acquisition announced Monday of the remaining shares of MGM stock by People Inc., formerly IAC, is another form of mergers and acquisitions.
CBRE Director of Equity Research John DeCree said, “We believe the casino sector is ripe for further LBO/MBO activity, given the strong FCF generation, proven revenue durability, depressed public valuations, and reasonable interest-rate environment, despite geopolitical volatility. Other potential take-private targets that remain undervalued by public markets include: Accel Entertainment; Entain Plc; Melco Entertainment; MGM Resorts; and PENN Entertainment.
“When it comes to MGM, DeCree said the operator already has significant shareholder concentration in IAC (26%) and looks uniquely cheap over the long-term through BetMGM and MGM Osaka. These opportunities, especially Japan, extend beyond most investors’ time horizon. MGM has been aggressively buying back stock, on the longer road to going private. MGM’s leverage is more approachable than Caesars; however, we believe any external buyer would need to pay a material premium for the major long-term growth initiatives – its Osaka Japan resort project. Moreover, the global regulatory landscape (Macau and Japan) and corporate structure – joint venture ownership of BetMGM, Japan, and Macau – make it a more complex situation for any potential external bidders.”
Entain has recently resurfaced in the media as a rumored private-equity target.
“Like Caesars, Entain is exiting its heavy capital cycle that included M&A, investments into the Bet/MGM joint venture, and regulatory penalties, making future cash flow more predictable and potentially easier to lever up,” DeCree said. “The value of a trophy asset like BetMGM embedded in the company remains underappreciated by public markets and gives a potential buyer long-term value creation opportunity.”
DeCree said Penn offers a similar durable casino cash-flow profile to Caesars with a long-term opportunity in its wholly owned digital business, primarily via igaming expansion.
“Traditional net leverage remains reasonable, but the lack of real estate ownership would make higher leverage levels potentially less palatable,” DeCree said. “That said, the current size of the enterprise ($4.8 billion) makes it more appealing to a larger pool of prospective buyers, whereas the sheer size of Caesars limited the buyer pool.”
DeCree said, “Melco is a controlled entity that trades at a unique discount to the Macau group with a public float that is too small and illiquid to attract institutional investor interest, leaving a structural valuation gap. An MBO would be the most likely scenario, given the insider ownership, and we see long-term valuation creation opportunities through subsidiary clean-up and portfolio optimization.
“We suspect Melco is committed to deleveraging and reinstating its dividend for now; however, if valuation remains depressed, Melco could be a unique MBO candidate,” DeCree said.
DeCree cited Accel as the only publicly traded pureplay distributed gaming operator, which has left valuation ambiguous without a benchmark. Despite a strong earnings growth track record and a meaningful recent catalyst in Chicago’s decision to legalize VGTs, public markets have been unresponsive to the company’s execution and growth outlook.
“Distributed gaming is a near-duopoly in mature markets, between Accel and J&J Ventures, the latter of which is already private,” DeCree said.
Finally, DeCree said recycled capital could be a technical tailwind for select gaming stocks. With about $6 billion of market cap being returned in cash to shareholders, he says they see an opportunity for some of that institutional capital to be redeployed to other gaming stocks that offer similar investment characteristics as Caesars, including Penn for regional gaming and wholly owned digital exposure; MGM for Las Vegas and digital exposure; and Boyd Gaming and Churchill Downs for casino/real estate exposure.
“Given its smaller market cap and near-term free-cash-flow inflection, Penn shares could be the biggest technical beneficiary from capital recycling out of Caesars,” DeCree said. “Notably, we believe some of this transition has already occurred as and would note recent upward price movement in the shares of MGM and PENN. We also see DraftKings as a potential investment choice for gaming investors exiting Caesars and looking to double-down on the digital thesis. However, given DraftKing’s market cap relative to Caesars, this transition is unlikely to move the needle.”
