This is getting to be old hat: Eldorado is doing a transformative acquisition.
Not many years ago, the company owned 1.5 casinos in downtown Reno. Then it branched out and bought a riverboat casino in Louisiana, a modest but important step beyond Nevada.
Three-and-a-half years ago, the company, owned by the Carano family, did its first transformational deal, buying three-property MTR Gaming and using MTR as its vehicle to become publicly traded. That put Eldorado into Pennsylvania, Ohio and West Virginia, a far distance from Reno, under its ticker symbol of ERI.
Eldorado followed up with buying out partner MGM Resorts in Reno, doubling its presence there to three adjacent downtown properties.
Then, last year Eldorado became a national casino operator in buying Isle of Capri: Say hello to Colorado, Mississippi, Florida, Iowa, Missouri.
That seemed like a lot to digest and it was commonly expected Eldorado would do just that for a while. Instead, Eldorado had another major announcement: buying most of Tropicana Entertainment and Grand Victoria riverboat from MGM and Hyatt. Now say hello to Atlantic City, St. Louis, Chicago and southern Nevada.
Eldorado promised immediate addition to earnings from the deal. So given the company’s history of fulfilling such promises, investors reacted. The stock soared 16 percent in one day to an all-time high over $41. Not bad for a company that could be bought under $10 a share not long ago.
Better yet, analysts responded by not only raising target prices, but saying their new, higher expectations did not include return on the investments from development of Pompano Park, Florida, real estate or other growth opportunities.
Ron Politzer of JP Morgan, for example, raised his target price to $47 a share saying he thinks Eldorado will cut costs at Tropicana and Grand Vic by $98 million rather than the $58 million Eldorado projects.
Dave Bain of Roth Capital thinks Pompano development could add $11 a share to his new target of $49.
So, Eldorado will have another challenge of managing a much larger company and wringing out the cost savings that it has done so well in previous acquisitions.
But be prepared for more. With net-debt-to-EBITDA and net-debt-to-EBITDAR expected to be at 4.4 and 4.9 times by year-end, Eldorado could buy again.
Churchill Downs
While Eldorado has been grabbing the M&A headlines, Churchill Downs has quietly been on its own buying spree.
Among the properties that Churchill is buying next (from Eldorado) are Presque Isle Downs and Lady Luck in Vicksburg, Mississippi, for $229.5 million.
That continues the famous racing company’s transition into a diversified gambling enterprise that last year got 50 percent of its EBITDA from casinos, almost 30 percent from racing, and over 20 percent from Twin Spires online wagering. Note: This factors out Big Fish, the social gaming division since sold to Aristocrat.
All three business divisions have been growing double digits. And Churchill is adding to its gaming operations by developing historical horse racing facilities in Kentucky. Those are basically slot machines in which game outcomes are determined by random selection of winners out of a database of previously run races and set up in a pari-mutuel formula, thus legal in Kentucky.
On a little-publicized note, Churchill is riding the modest, but nonetheless real, wave of growth in US horseracing handle after many years of declines, not to mention the company continues to develop the Kentucky Derby franchise into a significant growing money-maker.
Finally, with net debt-to-EBITDA at just 2.5 times, Churchill Downs has the financial wherewithal to keep on diversifying through acquisitions.
Let’s Not Forget The Reits
The Eldorado-Tropicana purchase was facilitated by Gaming and Leisure Properties, the gaming REIT that initially will get $110 million a year rent from Eldorado, which is buying just Tropicana’s gaming operations, not its real estate.
This is the second time that Gaming and Leisure has helped facilitate a deal with a company that prefers to own its legacy properties.
Gaming and Leisure had earlier purchased the real estate of Pinnacle properties where Boyd and Penn National are buying the gaming operations.
So, proven formulas are in place for casino industry consolidation to continue.
