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David Buys Goliath

The Eldorado-Caesars deal creates the world’s largest gaming company, but is it just the first shoe to drop?

David Buys Goliath

The biggest news so far this year is Eldorado Resorts buying Caesars Entertainment.

It creates America’s biggest casino company, presents opportunities for others through coming property divestitures and underscores the value of casino companies. For pure entertainment value, it is a great story of a small family-owned Reno business in a few short years becoming the nation’s largest casino operator.

And it promises to be profitable. Eldorado has a track record of growing the profitability of companies it acquires.

Eldorado CEO Tom Reeg believes the company can generate up to $4.5 billion in EBITDAR and $1.5 billion in free cash flow, or approximately $10 a share.

That suggests Eldorado shares could trade over $100—not bad for a stock now below $50, and that not all that long ago was in the single digits.

Eldorado expects first-year synergies of $500 million, $375 million of which would come from lower costs. Reeg gave an example of Eldorado’s comparative leanness: Caesars spends $60 million on third-party service providers. Eldorado spends $2 million.

And, you can bet that $500 million is conservative. It’s just a first-year figure. Eldorado grows profitability over time. EBITDA margins were 16.5 percent when it began its acquisition spree in 2014. They were 25.1 percent last year.

Further, with both companies nearly done spending on hotel room renovations, they will be in cash flow harvesting mode, Reeg said.

Here are some quick observations on the deal:

  • If there were an award for casino CEO of the decade, it would have to be a co-presented to Reeg and predecessor Gary Carano, now Eldorado’s executive chairman. The stock has multiplied tenfold under their stewardship and, as noted, the price could more than double from here.
  • A new approach. Caesars has been a bureaucratic and centrally run company. The new company will take advantage of centralized functions such as purchasing but will empower executives at the regional level who are closer to customers, Reeg said.
  • Whew! It’s over. Eldorado’s five-year acquisition run is basically over. Further, it has enough to chew on in the U.S. that international expansion isn’t in the picture.
  • The Las Vegas Strip might get more competitive. One criticism of Las Vegas has been the lack of entrepreneurship and customer care with Caesars and MGM Resorts controlling so much of the Strip.

Ownership will diversify as Eldorado slims down Caesars’ Strip presence. Already, TI owner Phil Ruffin and Golden Nugget owner Tilman Fertitta have expressed interest in buying properties.

As for other possible buyers, divesting properties could give Boyd a chance to return to the Strip.

  • REITs do it again. Once more, a deal that might not have seemed possible a few years ago has been made possible by a real estate investment trust, in this case, VICI Properties.
  • Related winners. William Hill and The Stars Group have been little-publicized winners as Eldorado expects to take its sports betting partners into the expanded company.

 

Who’s Next?

The age of big regional casino mergers may be over. It is hard to see MGM Resorts, Boyd, Penn National or the new Eldorado-Caesars merging, given antitrust issues and concerns about unproductive overlap in many markets.

That doesn’t mean there won’t be mergers, especially with REITs eager to facilitate deals. Here are some possibilities offered purely for the fun of speculation:

  • MGM and Wynn Resorts. We’ve seen this movie before when MGM bought Steve Wynn’s Mirage Resorts more than a decade ago.

The strategic rationale is that Wynn’s Las Vegas properties would give MGM dominance in the city’s upscale market, both for domestic customers and Asian VIPs.

In addition, Wynn CEO Matt Maddox says the company intends to build casinos in major cities. That’s MGM’s strategy, too. And Encore Boston Harbor would fit nicely with MGM’s properties in the Washington, D.C., and New York City areas, Biloxi, Detroit and Atlantic City (Philadelphia).

  • Someone buys Red Rock Resorts. The Fertitta brothers have made their billions and can move on. They don’t need Red Rock. Owning their most upscale Las Vegas locals properties (Red Rock, Green Valley Ranch, Palms, Sunset Station) and divesting the others could appeal to MGM or any of the big regionals, except local competitor Boyd because of concentration concerns.
  • American Indian interests. Mohegan has a strategy of growing internationally, but it also has the wherewithal to buy U.S. expansion if it desires. Foxwoods needs geographic diversity. The Poarch Creek could pick off a divested property or two.

Hard Rock International could make a big splash regionally or in Las Vegas. Cosmopolitan has a hefty price tag at a reported $4 billion-plus, but if it can be worked out, the property and its customer base fit the Hard Rock brand. Or maybe Planet Hollywood, which already has a Hard Rock-like theme.

  • International companies haven’t been eager to jump into the U.S., except for Genting, perhaps because of intrusive suitability investigations required to get licensed. But the money, and perhaps the ambition, might be there. Melco Resorts CEO Lawrence Ho is U.S.-educated and is expanding internationally. Galaxy Entertainment already owns 5 percent of Wynn and might want more.
  • Private U.S. companies that have been steadily growing like Neil Bluhm’s Rush Street Gaming and Tilman Fertitta’s Golden Nugget. Both are ambitious. Rush Street is pursuing a license in Japan and, as mentioned, Fertitta has expressed interest in Caesars properties.

Finally, a company not often mentioned in speculation like this: Churchill Downs. It owns a number of small properties that might be of interest to other small operators, while the Kentucky Derby and online wagering platform Twin Spires could appeal to a bigger operator—say, Penn National with its own horse-racing heritage.

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