The tanking of the stock market and the shutdown of the nation’s casinos will delay the mega-merger between Caesars Entertainment and Eldorado Resorts. But they won’t stop it.
CNBC, citing sources with knowledge of the $17.3 billion deal, says the expected closing has been pushed from April to June. This concurs with what Wall Street analysts have been saying, although none have committed to that exact time frame.
“We believe it is difficult to expect the transaction to close while the casinos remain closed,” Deutsche Bank’s Carlo Santarelli said in a March 24 client note reported by industry new site CDC Gaming Reports.
The merger calls for Reno, Nevada-based Eldorado, a mid-market leader with 23 casinos owned or operated in 11 states, to buy the much larger Caesars for $8.40 in cash per Caesars share and 0.0899 shares of Eldorado stock, representing a transaction that was valued at approximately $12.75 per share when the deal was announced last June.
The combined business of some 60 properties owned or operated in 18 states will keep the Caesars name and continue to trade on Nasdaq. But its board of directors will be controlled by Eldorado and its headquarters moved from Las Vegas to Reno.
The initial sale price represented a premium of around 25 percent per Caesars share and spelled a tidy profit for corporate raider Carl Icahn, who engineered the deal after buying his way into a controlling position at Caesars earlier in the year.
Needless to say, a lot has changed since then.
As of April 2, with nearly all 980 U.S. commercial and tribal casinos closed, Eldorado’s stock had lost more than 80 percent of its value since the start of the year, in line with the broader stock market crash and a collapse in gaming prices across the board. Caesars, which at one point in 2019 was riding a merger high of $14-plus, was trading under $7. So far in 2020, it’s down more than 50 percent.
Then there is the debt involved, which in Eldorado’s case will soar to around $15 billion post-merger, including some $9 billion in inherited Caesars debt, although Eldorado management expects to shave that with some $500 million in cost cuts and property sales, the latter process already well under way.
“The deal was constructed with a balance sheet to survive a crisis, with ample liquidity and no debt maturities until 2024,” one source told CNBC.
Caesars, which has been busily selling casinos to VICI Properties, the separately traded real estate investment trust the company spun off in 2017 from its Chapter 11 reorganization, has around $3 billion in cash on its balance sheet, counting the recent $460 million sale of the Rio in Las Vegas to a New York property group.
Eldorado also has sold off several casinos and has two more sales pending in Mississippi and Missouri in a $230 million deal with regional operator Twin River Holdings. Assuming those close, Eldorado will have roughly $850 million on hand.
The financing for the merger, procured from 11 banks at attractive rates, is also believed to be firm, and any alterations to that now would mean new shareholder votes and a new effort at financing, a problematic bet at best under current conditions.
“And we don’t see the banks backing away,” Santarelli said.
Then there’s the tax payroll benefit in the massive Covid-19 federal relief package, which could boost the cash flow of the combined company by hundreds of millions of dollars.
Another factor that should push the sale to close is the breakup fee—if it falls through, Eldorado would be forced to pay Caesars $836 million. That figure is “likely the biggest motivating factor to move forward with the transaction,” said Santarelli, “and a key reason why we believe that is likely what Eldorado will do.”
Eldorado also is paying a daily ticking fee of $2.3 million which accrues and is paid to Caesars shareholders upon closing, which is already likely to raise the value of the merger to some $17.5 billion assuming a late June close.
Perhaps the bigger questions center on what the industry will look like as that day approaches. Namely, how long will the nation’s casinos stay closed, and how quickly will business ramp up after they reopen?
For the regional drive-up markets, the hope is that pent-up demand will take care of any problems, as it’s expected to do for bars and restaurants. In Las Vegas, however, Caesars’ core market, recovery might not be smooth if concerns linger about the dangers of air travel.
“The gaming industry won’t turn back on like a faucet with water,” Nevada Gaming Commission Chairman Tony Alamo told CNBC. “Once they open, it will be the economic drivers and the psychology of this country that’s going to restart the gaming industry, and that timeline nobody knows.”
In the meantime, Eldorado, which had committed to paying its employees through the end of this week, has drawn down more than $480 million from its credit facility. Caesars, for its part, has been furloughing and laying off 90 percent of its workers, as many as 3,200 in Las Vegas alone, according to news reports.
Seven state regulatory agencies have approved the merger, but it has yet to pass muster in the key states of Indiana, New Jersey and Nevada, which have postponed hearings on the deal in the wake of the current crisis. The Federal Trade Commission also has to sign off on it.
