The future of the Caesars brand’s bid for a Japan casino licence and for construction of a South Korea casino is still to be clarified, following Monday’s announcement that United States regional casino operator Eldorado Resorts Inc was poised to take over the higher-profile but also highly-indebted Las Vegas giant Caesars Entertainment Corp.
Tom Reeg, the chief executive of Eldorado, was quoted by the Associated Press as saying “no firm decisions” had been made regarding international investment, but that the opportunity would have to be “stupendous for us to be running in that direction”.
The deal values the target at US$12.75 per share, which one set of analysts said represented a 28 percent premium on the target firm’s closing price on Friday. The suitor was expected to control circa 51 percent assuming the deal was ratified by relevant regulators.
Mr Reeg was cited by Associated Press as telling analysts and investors the merged entity expected to sell some properties that might allow it to avoid U.S. federal anti-trust issues. It was also evaluating whether to sell some Las Vegas Strip properties from within the Caesars portfolio.
Caesars Entertainment confirmed in a Monday filing to the United States Securities and Exchange Commission the US$17.3 billion valuation placed on the firm by Eldorado. The suitor is looking to find as much as US$500 million in cost savings in the first year after closing of the deal. The combined company will control approximately 60 casino-resorts in the United States, according to the statement.
Eldorado’s chairman Gary Carano and CEO Mr Reeg will lead the combined company, which will use the Caesars name, according to the statement. The board of directors of the new entity will consist of 11 members, six of whom will come from Eldorado.
Caesars Entertainment was one of 12 respondents recently in the Japanese city of Yokohama’s request-for-information phase in that conurbation’s effort to host a casino resort. Up to three licences are to be allowed in a first phase of liberalisation in Japan.
Caesars Korea – the first Asian casino resort supposed to be developed by Caesars Entertainment – was due to be completed “in early 2021”, said a then senior executive in comments to GGRAsia a year ago. Caesars Entertainment has a big presence in Las Vegas, Nevada, including via Caesar’s Palace (pictured) but famously missed out on bidding for a Macau licence at the time of market liberalisation at the start of the current century.
Caesars Entertainment said in its first-quarter earnings results in May that the company expected capital expenditure (capex) in the range of US$335 million to US$410 million in 2019, which the company said would be about US$140 million higher to include “cash deployment” in relation to the South Korean project.
A note from brokerage Sanford C. Bernstein Ltd on Monday said Eldorado swallowed “a whale”.
“Caesars Entertainment had approximately US$7.3 billion net debt outstanding – as of first quarter 2019 – excluding approximately US$1.1billion convertible notes,” noted the Sanford Bernstein memo from analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu.
It added: “The consideration amount will be partially funded through VICI Properties [real estate investment trust] acquiring additional properties and entering into lease modifications, which will result in gross proceeds to Eldorado/Caesars Entertainment of US$3.2 billion. The transaction will close in second-half 2020 pending regulatory approvals.”
The brokerage said it thought the US$17.3 billion valuation attached to Caesars Entertainment was “high”, given that it represented 10.5 times the estimated 2020 earnings before interest, taxation, depreciation and amortisation (EBITDA) and 11.3 times 2019 estimated EBITDA. Eldorado has only US$4-billion in market capitalisation.
Sanford Bernstein said it was currently “sceptical” that US$500 million in cost savings would be possible.
“Assuming such synergies do materialise, the pro-forma 2020 estimated enterprise value over EBITDA would be only 8x – very reasonable in our view,” wrote the analysts.
Caesars Entertainment – which exited bankruptcy in October 2017 – confirmed in April the appointment of Anthony Rodio as chief executive. The company announced the same day the creation of what it termed a “transaction committee” to “oversee the company’s evaluation of ongoing efforts in creating additional shareholder value”.
The committee was composed of four independent company directors, including two appointed earlier in the year by activist investor Carl Icahn. Mr Icahn acquired a stake - in separate transactions – of nearly 10 percent in Caesars Entertainment.
(Updated 8.56am, June 25)
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