Tilman Fertitta’s attempt to buy Caesars Entertainment by persuading Caesars to buy him didn’t pan out, but that hasn’t stopped a determined group of activist hedge funds with stock in Caesars from pushing the gaming giant into a merger.
The latest reported suitor? No less than Las Vegas Strip mega-rival MGM Resorts International.
That’s not to say there’s an offer on the table, not yet anyway, but news reports have it that MGM, which is owned in sizable quantities by some of those same funds, has hired investment bank Morgan Stanley and law firm Weil, Gotshal & Manges to advise the company on a potential tie-up.
Chaney Sheffield, an ex-Morgan Stanley investment banker who heads lodging and gaming investments for hedge fund Canyon Partners, a major shareholder in both companies, is pushing for a deal, according to sources that say Canyon also was behind the ouster of Caesars CEO Mark Frissora, who has announced he is leaving the company in February.
“Everyone knows that without a CEO, Caesars is in play,” an unnamed source close to the situation told the New York Post.
The funds, which together own around 25 percent of Caesars, are reported to be unhappy with the fact that the stock (Nasdaq: CZR) is down 25 percent year to date, just 13 months after the company emerged from a complex Chapter 11 reorganization that took two and half years to hammer out. It was a leveraged private equity buyout of then-Harrah’s Entertainment in 2008 that produced the current Caesars and landed its largest operating subsidiary in U.S. Bankruptcy Court not seven years later, saddled with more than $18 billion of debt.
At current prices Caesars is worth around $22 billion in terms of enterprise value. MGM (NYSE: MGM), whose shares are down around 15 percent year to date, is worth approximately $30 billion.
Combined they would own 20 casino hotels on the Las Vegas Strip, half its hotel rooms and command 50 percent of its revenues. In Atlantic City they would own four of the market’s nine casinos, a portfolio that separately accounts already for close to 60 percent of the city’s gaming take.
Looking beyond their massive U.S. holdings, MGM also has a presence in the lucrative Macau market through its majority stake in Hong Kong-listed MGM China Holdings. Caesars has long coveted a piece of Asia and is developing a casino in South Korea near the capital of Seoul targeting the close-in China market and maneuvering for a resort license on Australia’s Gold Coast that similarly would target Chinese and other deep-pocketed Asian gamblers. The two companies also are seeking casino licenses in Japan, an untapped market as yet which experts believe could generate $10 billion or more in gaming revenue a year.
An investor’s dream, you might say, but a challenging merger to pull off given the respective sizes of the two companies—and one certain to trigger a host of regulatory concerns.
“It gives them anywhere from 18 to 20 casinos, I think, at the count on the Strip,” said Howard Stutz, executive editor of industry newsletter CDC Gaming Reports. “That’s a virtual monopoly, and I think you’re going to see the Federal Trade Commission jump all over this. There are a lot of antitrust issues with it.”
There would be concerns on numerous state levels as well, notably in New Jersey, whose gaming regulations prohibit any activity in Atlantic City that might result in “undue economic concentration”.
Then again, the industry is no stranger to large-scale mergers. Caesars bought Harrah’s, MGM bought Mandalay Resort Group, Penn National bought Pinnacle. Earlier this year, MGM’s MGM Growth Properties REIT tried to scoop up Caesars’ VICI Properties REIT with an offer that VICI rejected.
“We’ve seen this in the gaming industry in the past,” Stutz noted.
MGM might not be the only suitor either. According to Post sources, Wynn Resorts may have its eye on Caesars, along with Malaysia-based resort conglomerate Genting Group, which is developing a giant casino hotel of its own on the Las Vegas Strip, and private equity firms that are licensed to operate casinos, like The Blackstone Group.
As one gaming insider put it, “I think the next three to four months will be fascinating.”
