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Eldorado Purchase of Caesars: Main concern is debt held by both companies

Arguably the biggest name in gambling, Caesars Entertainment, has been bought by Eldorado Resorts in a deal worth $17.3bn.

The announcement comes after a serious of poor financial results during the last decade for Caesars, alongside escaping bankruptcy in 2017.

Eldorado will pay $8.40 per share in cash and 0.0899 shares of Eldorado stock for each Caesars share, or $12.75 per share. The transaction values Caesars at about $8.6bn, and Eldorado will pick up about $8.8bn of debt held by the casino.

The new casino giant will use the Caesars name but all of its top leadership will come from Eldorado, including Chairman Gary Carano and CEO Tom Reeg to other important spots.

After the deal was announced on Monday Caesars shares climbed 14.5% to $11.44, while Eldorado shares sank 10.6% to $45.77.

Eldorado Resorts will now position itself to become the biggest gambling firms in America, providing 60 casinos and resorts across 16 states, with 35 emerging from Caesars.

Tough competition is forcing gambling firms to consolidate

Pressure exerted by the growth of online gambling has forced the hand of leading companies to consolidate to achieve cost savings that are becoming ever more important for long-term prosperity.

The deal paints a bleak picture for the future outlook of the industry, with traditional gaming companies being forced to consolidate due to the intense competition provided by online gaming firms.

Penn National Gaming successfully completed the acquisition of Pinnacle Entertainment with a transaction fee of $2.8bn in 2018, which enhanced the position of Penn as a leading company in North America with 40 facilities in 16 states.  

Wynn Resorts had to abandon a $7.1bn bid for Crown Resorts, an Australian gambling powerhouse, after media leaks of the terms of the deal were revealed during 2019.

By consolidating, the joint firm will be able to stream line costs and tie in together impressive portfolios, alongside million dollar marketing campaigns that will create vital synergies to compete in tough market conditions. 

The merger between Eldorado and Caesars will mount enormous pressure on their rivals to follow a similar path.

Experience will strengthen the case behind latest purchase

Whilst the deal is a risk for Eldorado, past experiences with similar acquisitions places the company in a strong position.

The overriding concern regarding the acquisition is the significant debt between both companies. Eldorado debt is currently up to $5.8bn, whilst Caesars debt brings $8.8bn.

Nevertheless, Eldorado CEO Tom Reeg believes the companies are capable of generating $4bn to $4.5bn of EBITDAR in 2021. Reeg also noted that there will be at least $500m in annual synergies, with the initial breakdown of synergies expected to be 75% to 80% costs, and 20% to 25% revenues. Eldorado has a strong track record of acquiring gambling firms and implementing a cost savings structure to improve the cash flow. The Isle of Capri and Tropicana Entertainment being prime examples.

Further Reading:

Company Profile – Eldorado Resorts Inc

Company Profile – Caesars Entertainment Corporation