Attack of the Activist Investors

It’s not just Carl Icahn making demands of Caesars; any public company must deal with shareholder demands

Attack of the Activist Investors

Carl Icahn buying 9.8 percent of Caesars Entertainment has returned the most celebrated activist investor to gaming.

But Icahn isn’t alone. Investors with a reputation for rattling things to drive up stock prices have been moving in since last year. Consider:

  • Caesars. Before Icahn, there were others, such as HG Vora Capital Management, who bought a stake in September prompting Caesars to get defensive advice from Goldman Sachs.
  • MGM Resorts has drawn investment from Corvex Management, and Starboard Fund, which famously shook up Darden Restaurants in helping drive up the stock price 60 percent in 2016.
  • Playtech has attracted Jason Ader, who earlier helped convince Amaya to sever ties with CEO and chief shareholder David

Baazov. The company, now The Stars Group, today is a diversified online behemoth with a nearly $5 billion market cap.

The arrival of the activists is another sign that the casino industry is maturing. In earlier stages, the emphasis was on growth. Companies came into being to grab riverboat licenses. Existing companies went public to tap public debt and equity markets. Everyone borrowed in the junk bond market to build.

Those days are long behind, and mergers and acquisitions have become the way to grow now. Buy a competitor and wring out expenses, lower marketing costs, achieve economies of scale.

Along with that, buy back stock and start paying dividends. It was a rare gaming bird that paid dividends just a few years ago. Recurring dividends are now routine.

So, we’ve reached the latest stage: outsiders in the form of activist investors coming in and demanding what are euphemistically called reviews of strategic alternatives.

In most industries, there would be yet another stage: mergers between industries. Many believe that won’t happen with gaming because lodging and entertainment executives would not want to go through gaming’s intrusive licensing process.

But that isn’t necessarily true. It’s worth noting that lodging companies Promus, Ramada and Hilton, and lodging investors such as Barry Sternlicht, once owned casinos. Their problem was that they didn’t understand casinos and couldn’t tolerate the volatility of gamblers sometimes winning and wrecking a quarter’s earnings.

The gaming world has changed considerably since then, as have views of the industry by Wall Street and public policymakers in most states.

Meanwhile, the current efforts by activist investors to unlock value is being met by some receptivity on the part of casino companies. Aside from Caesars’ initial apprehensive reaction, companies appear open to working with their new investors rather than combating them.

Caesars has appointed three Icahn allies to its board in place of three incumbents, and with the opportunity to appoint a fourth. Caesars also solicited Icahn’s advice on a CEO to replace Mark Frissora, who is scheduled to depart by April.

No shrinking violet, Icahn quickly suggested Tony Rodio, CEO of little Affinity Gaming and former CEO of Tropicana Entertainment, another gaming success story for Icahn, who increased that company’s value several-fold before selling for $1.85 billion to Eldorado Resorts.

Icahn’s goal for Caesars is a lot more than a new CEO and some friendly board members. He wants the company to sell all or part of itself. Caesars has unrealized value in its many properties, and more potential in its Total Rewards player loyalty program, Icahn has said.

MGM almost immediately reported that it was having constructive discussions with its new investors, and followed that up with creating a committee to study the company’s real estate holdings and make recommendations on what to do with them. On the three-member committee is Keith Meister of Corvex, who also had won a seat on MGM’s board of directors.

Ader won one of his goals at Playtech when founder and former CEO Teddy Sagi sold his remaining shares. Sagi denied his sale was in response to Ader, who had warned that Sagi’s former legal problems would keep the company out of the emerging U.S. online gaming industry if he remained a major shareholder. Regardless of Sagi’s reasons, he’s gone, and Playtech has just announced a major supplier agreement with GVC, meaning the company will be providing products to the online market in New Jersey, where GVC operates.

Of course, the point of all the activism isn’t just to rattle management or win tactical battles. It’s to raise stock prices.

In that regard, the activists haven’t moved any needles yet. MGM is about flat with its September price when the activist holdings were revealed; Playtech is off around 10 percent since then; and Caesars, which was around $12.80 when positions by HG Vora and other activists were revealed, was under $9 as of this writing.

In fact, the stocks have had similar patterns. They bumped up when activist stakes were announced, and then settled down. Even the arrival of Icahn at Caesars provided just a blip before another dip.

However, the activists have records of success. And Icahn, especially, has demonstrated the ability in gaming to buy assets that eventually provide him with a significant reward. In the case of Caesars, that means a public company open for others to play along with him.