The board of directors of Caesars Entertainment was expected last week to unanimously reject a merger offer from casino and restaurant tycoon Tilman Fertitta. Later in the week, Caesars hired Goldman Sachs to fend off any attempt at a takeover by activist investors.
News of Fertitta’s overture had sent Caesars’ shares soaring, but the board was reported to believe the complex reverse merger would saddle the Las Vegas-based casino giant, only one year out from a massive bankruptcy reorganization, with too much debt.
“That is certainly not attractive,” a source close to the internal discussion at Caesars told The New York Post.
The company still carries a debt load of around $9 billion, way down from $25 billion of debt that drove it in 2015 to seek refuge in U.S. Bankruptcy Court, the result of a 2008 leveraged buyout by private equity funds Apollo Management and TPG Capital.
If anything, Caesars’ policy since the reorganization has been to make up for lost time by growing through selective strategic acquisitions in the U.S. in partnership with VICI Properties, the real estate investment trust forged out of the reorganization, and to aggressively pursue opportunities in South Korea, Australia and key emerging markets such as Japan.
In a move designed in part to help it diversify away from a business model heavily weighted toward the Las Vegas Strip, Caesars committed $1.7 billion last year in conjunction with VICI to acquire Centaur Holdings, a privately owned operator with casinos and racetracks in the Indianapolis area, and is pursuing a $1 billion-plus deal with VICI to acquire Jack Entertainment, another Midwest operator with six casinos in Cleveland, Cincinnati and Detroit.
Another twist developed last week, when rumors circulated that MGM Resorts might be interested in acquiring Caesars if it could do so in a friendly takeover. There have been no reported talks between the two gaming giants and neither would comment on the rumors.
In hiring Goldman Sachs, which has a team dedicated to defending against activist investors, Caesars hopes to create an orderly and controllable sale process if that is going to happen. And an unnamed gaming analyst told the Post that Caesars shareholders “want something to happen,” and that Caesars CEO Mark Frissora, whose contract is up in February, is likely to listen.
Wall Street analysts say combining with Fertitta’s five closely held Golden Nugget casinos and his scores of Landry’s and other well-known restaurant franchises would boost earnings of the enlarged company through cost-cutting and leveraging loyalty programs. But the new entity also would need to sell assets, including casinos, to reduce high debt levels post-merger.
JPMorgan analyst Daniel Politzer put the potential increase in earnings at between $100 million and $200 million a year. But he noted at the same time that the assumption of Fertitta’s debt, about $4 billion, according to published reports, would saddle the combined company with a leverage ratio of about 5.5 times, high by gaming industry standards.
“We assume that Fertitta could help finance the transaction with sale leasebacks at some casino properties (Las Vegas, Laughlin, Atlantic City), and the combined entity would also likely divest an Atlantic City property. We assume Bally’s, as it is the smallest contributor,’’ Politzer said.
Bothe Politzer and Credit Suisse analyst Cameron McKnight said Fertitta’s offer underscores how undervalued many of the listed U.S. gaming giants have become as visitation and convention attendance has softened in Las Vegas over the course of 2018. The shares of major Las Vegas gaming operators have tumbled more than a quarter from their peak earlier this year.
“We believe the overarching takeaway is that strategic and financial buyers recognize the seemingly silly valuations most operators have traded to in the recent swoon,’’ Politzer said.
