Deal or No Deal?
This is the deal that no one really believes. On one side you have Caesars Entertainment (CZR) combining middle-market and premier properties in Vegas, Caesars and Harrah's getting the lipstick treatment from renowned raider and veteran greenmailer, Carl Icahn with a 28.5% stake , accumulated late 2018 and early 2019 at an average cost of $9 per share, sans big hedge funds , managed by Appaloosa Capital, Soros and Canyon Capital and ABC, Icahn has his management put in place and his directors on the board the goal is to make this company and lean and mean . And I know you have a Mount Everest equivalent 600% debt to equity ratio, a staggering $ 18 billion dollars of long-term debt .
Enter the liquidator, a tough operator with a trained eye on the bottom-line, CEO Tom Reeg, an M&A specialist at El Dorado (ERI). Reeg is high rolling on a string of successful acquisitions cutting out the excesses, extracting every extra iota of EBITDA.
El Dorado management has aspirations of building the next great gaming powerhouse, shooting for an operating income above $1 billion, well positioned to leverage outsized growth potential in sports gaming with significant stakes in agreements with the major infrastructure builders, William Hill (WIMHY ) and The Stars Group (TSG).
But how will they ever manage to buy on a company four times their size and digest $18 billion of debt. ? They would need to raise a minimum of $2 billion to finance this gargantuan play, creating a new neo- behemoth in gaming. The combined company would have over a $ 1 billion of operating revenue, over $ 3 billion of ebita and have a combined enterprise value over $32 billion dollars.
Icahn is in at $9. Many think he would want at least $13 to let go. Eldorado is offered $10.50. There is a big spread in the bid- ask in this potential deal. Rumors abound that Icahn may take a lower offer. Management at E Dorado may be creating a war chest for this deal at present, raising nearly $ 4 hundred million by selling non-core properties in the Midwest and in West Virginia last week. Enter the friendly “White Knight”, VICI Properties ( VICI), the major buyer of these El Dorado properties, the entity that just so happened to be the specialty REIT that Caesar’s and Harrah's shuffled their properties over to when they deleveraged in 2017
Eureka ! We have just found our third party facilitator, endowed with low cost financing at 5% cost of capital. Will Icon take $12 to exit gracefully? To accomplish this it may require $600 million to $1.2 billion in fresh capital. At $11, CZR would not be dilutive to ERI . A bump up only slightly to $12 based on ev / sales ratios of the two enterprises could work based on cost efficiencies achieved by Reeg’s cost cutting management style. Still, the market doesn't see it happening therefore the significant discount to the speculated deal price.
Many risks exist. What is the possible timing of such a deal? Well, Icahn isn't getting any younger and may finally want to hang it up. This would be a nice way to go out on top. What if the deal doesn't happen? You will own a highly levered company with one of the world's most successful activists, with his management team squeezing out costs to generate improving ebitda, trading at a premium of 10%.to industry comparables.
With a Dow Jones industrial Average that's fairly valued at 3000 a 10 to 20% return should not be underestimated. I am long CZE.
Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
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