In the casino business, the minnow is swallowing the whale.
Eldorado Resorts Inc.’s USD8.58 billion acquisition of Caesars Entertainment Corp. means an underdog from Reno, Nevada – a town long in the shadow of Las Vegas – will become the largest owner of casinos in the U.S.
In the deal, announced Monday, Caesars shareholders will receive about $12.75 a share, including $8.40 in cash. That’s a 28% premium to the casino chain’s close on Friday.
While the combined company will retain the Caesars name, there’s no mistaking who’s buying whom in this transaction: Eldorado, with a market value of less than $4 billion, is clinching the giant from Las Vegas and its flagship Caesars Palace.
Eldorado’s quick ascent to the top of the industry benefited from a campaign by activist billionaire Carl Icahn, Caesars’ biggest shareholder, who pushed for a sale in recent months. The Reno company is buying an ailing Caesars, still coping with the fallout of a 2008 leveraged buyout that left it with a mountain of debt. But it wasn’t the only suitor: Golden Nugget owner Tilman Fertitta proposed merging his restaurant and casino empire with Caesars last year.
RENO ROOTS
Eldorado dates back to a single casino opened in Reno in 1973 by Donald Carano, a lawyer who died in 2017. The town, which calls itself “The Biggest Little City in the World,” has always been the second fiddle of Nevada’s gambling industry.
The business has grown exponentially in recent years under the direction of Tom Reeg, who is now chief executive officer and will lead the combined Eldorado-Caesars along with Chairman Gary Carano and the rest of Eldorado’s management. Among its purchases, Eldorado acquired MTR Gaming Group and Isle of Capri Casinos, and last year added Tropicana Entertainment, which was controlled by Icahn.
“Eldorado is 5 for 5 in the merger department and everyone time they announce synergies, they find more,” said Chad Beynon, an analyst at Macquarie.
Eldorado, which still counts the founding Carano family as its largest shareholder, had 26 casinos in 12 states. Combined with Caesars, it will boast 60 owned, operated and managed casino–resorts across 16 states – including chains like Harrah’s. Tellingly, the enlarged company will be headquartered in Reno.
ROUGH ROAD
Like Caesars, Eldorado has had its ups and downs. The Reno market was pummeled by competition from Indian casinos in Northern California and the expansion of gambling across the country. In 2012, the company put one of its subsidiaries – the Silver Legacy Resort Casino, a joint venture with MGM Resorts International – into bankruptcy.
For a time, it seemed the Carano family would be more likely to have long-term wealth from their winery Ferrari-Carano Vineyards in Healdsburg, California. Then the family set on a strategy of diversifying its casino business through acquisitions.
Reeg, a former banker who’s now 47, joined the board of directors in 2007. With the demeanor of an accountant more than a casino boss, Reeg has built a reputation for cutting costs and boosting profits. He consolidated functions at resorts the company acquired and cut back on the promotions that often lead to vicious competition in small markets.
NEGOTIATING SKILLS
Eldorado also boosted results at its properties by adding additional hotel and dining options, such as the Row, a food court in Reno, and a hotel near its property in Columbus, Ohio. Reeg has proven himself a shrewd negotiator outside of acquisitions, cutting deals with William Hill Plc and the Stars Group in the emerging market of sports betting. He’s also teamed up with Maryland’s Cordish Cos. to develop the area around a horse track in Pompano, Florida.
Still, Reeg will have his work cut out for him with Caesars, which is competing with newer resorts in places like Atlantic City, New Jersey. Apollo Global Management LLC and TPG, the two private equity giants in the 2008 leveraged buyout of Caesars, took a bath on the company before exiting the investment several months ago. Their departure allowed Icahn to swoop in.
Caesars casinos are likely to contend with even steeper competition in states such Illinois, which recently authorized six new casinos – including one in downtown Chicago.
Eldorado and Caesars said Monday that they have identified benefits of $500 million by combining the businesses, and expect the deal to boost cash flow immediately. A parallel agreement will see VICI Properties Inc. acquire some of the companies’ real estate, generating $3.2 billion of proceeds to help pay down debt.
“As with our past transactions, we have a detailed plan for significant synergy realization,” Reeg said in a statement. Christopher Palmeri, Bloomberg
Carl Icahn proves deft dealer again in Caesars win
In M&A, much like in blackjack, players have to be wary of a stiff hand – bid too high and it could be a bust. That’s especially true when the dealer is Carl Icahn.
Eldorado Resorts Inc., a casino operator, is being punished by shareholders for its acquisition announced Monday of Caesars Entertainment Corp. Eldorado’s stock tumbled more than 8% percent.
The company agreed to buy its Las Vegas-based rival for USD17.3 billion, about half of which is made up of debt.
It’s the biggest casino deal since Caesars’ ill-fated leveraged buyout by TPG and Apollo Management in 2008 (which came together just before the financial crisis took hold and later led Caesars into bankruptcy). Eldorado also struck a parallel $3.2 billion deal with VICI Properties Inc. for certain related real estate assets, such as the Harrah’s Resort in Atlantic City.
Icahn, Caesars’ top shareholder, had been pushing for a sale of the company and helped install industry veteran Tony Rodio as its CEO in April. The situation happens to bear close resemblance to another deal Eldorado did last year, when it acquired Tropicana Entertainment from Icahn Enterprises LP, the billionaire’s holding company, for $1.85 billion. Rodio was CEO of Tropicana, too.
With the Caesars transaction, Reno, Nevada-based Eldorado is expanding its portfolio to 60 casino resorts and gaming facilities in 16 states. It had just two as of 2014, according to Bloomberg Intelligence. There are the benefits of getting bigger, but at the same time, Eldorado’s calculations leave little room for error.
Its offer for Caesars is a combination of cash and stock that amounts to $12.75 a share, a significant bump from its earlier $10.50-a-share bid that was reported this month by the New York Post, citing an unnamed source. On average, analysts pegged the stand-alone value of Caesars shares at $11 apiece.
The final takeover price is a 35% premium to its average closing level over the past 20 trading sessions, though Icahn himself notes that it’s 51% higher than Caesars’ stock price before he won three seats on the board in March and began making his sale push. Icahn built his stake when the stock was trading below $9. MDT/Bloomberg
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