Independent market research for the future investor.

(Shaokun Chen, Claudia Horsham & Nikhil Sahdev)

Introduction

At a time when banks that have agreed to finance leveraged buyouts are starting to feel the pain from the lack of investors willing to purchase high risk corporate debt (Bloomberg, 2020), casino operator Eldorado Resorts has sealed the cash-and-stock $17.3 billion deal, to purchase Caesars Entertainment in July (Financial Times, 2020). The merger, first mentioned in 2019 will create one of the largest companies in the US and the biggest casino operator spanning the globe.

The Nevada-based company was founded in 1973 with just one hotel-casino in Reno but has grown through its zealous acquisition strategy since 2005 (Caesars Entertainment, 2020). Its most recent acquisition was Tropicana Entertainment in 2018 for $640 million (Bussinesswire, 2018). The share price of Eldorado has climbed more than 12-fold over the past five years, as shown in the graph below, achieving an enterprise value of $8bn (Financial Times, 2020). However, since late March the share price of Eldorado has tumbled due to widespread closures of its casinos and hotels due to coronavirus.

Before being acquired by Eldorado Resorts, Caesars Entertainment Corporation was a public company majority-owned by a group of private equity firms and activist investor Carl Ichan, who urged Caesars to put itself up for sale to cut costs and reduce debt (MarketWatch, 2020). The gaming group was formerly the best managed Las Vegas gaming group due to its distinctive customer loyalty programmes that provide benefits to customers across its resorts in a number of states. However, a leveraged buyout on the cusp of the 2008 financial crisis of Caesars by Apollo Global Management and TPG Capital resulted in the casino-entertainment provider to enter bankruptcy protection in early 2015, only emerging in October 2017. Shares of Caesars have fallen by more than a quarter since 2017 due to concerns by investors over a saturated gaming market within the region (Financial Times, 2019).

Motivations

The merger came at a time when Caesars Entertainment has racked up large amounts of debt, assuming $8.8 billion in liabilities on the company’s books (Reno Gazette Journal, 2020). As well as this, Caesars has had to deal with a knock to the industry as a result of the global pandemic which has hit the US the worst, impacting travel and tourism, with Nevada having to shut down its casinos for several months. Nevertheless, Eldorado did not back down and the deal was completed on 20 July 2020. The leveraged buyout of Caesars by Eldorado Resorts will create strategic alliances with leaders in the betting and online gaming industry. It will place the company in a situation where the combined company can achieve continued growth and create value for stakeholders through upgrading casinos and hotel rooms to help attract customers.

Eldorado Resorts had the ‘financial bandwidth’ to acquire Caesars Entertainment as Eldorado Resorts’ total lease-adjusted leverage ratio in 2018 (following the acquisition of Tropicana Operations) was forecast to be in the mid-5x area (S&P Global, 2018). A low leverage ratio indicates that a company, such as Eldorado Resorts, is using less debt to finance its assets and operations and sales are generating enough revenue to grow the company’s assets through profits. 

Details about the deal

Eldorado Resorts and Caesar Entertainment closed the $17.3 billion cash-and-stock deal on 20th July 2020. This includes Caesars ‘s debt, which was valued at roughly $8.8bn. The agreement set forth will have Eldorado paying $12.75 for each Caesar share outstanding. This includes $8.40 a share in cash and 0.0899 of Eldorado stock. This totals $7.2 bn cash (which is 77 million Eldorado common shares) (ICLG 2020). All of Caesar’s debt will also be assumed by Eldorado Resorts. Eldorado announced Eldorado netted $672 million in proceeds after the US markets closed on 16th June, following an announcement the previous day of the sale of 18 million shares (Wall Street Journal, 2020).

To fund the deal, both parties have agreed to sell their land and properties to VICI Properties, a real estate investment trust, for $3.2 bn (Casino.org, 2020). The cash from this transaction will be used by Eldorado to buy out Caesar.

Another source of capital-raising which Reno based Eldorado is using is a massive corporate debt sale. They will be selling £3.06 bn in senior secured notes with a maturity date in 2025, $1.875bn of senior notes maturing in 2027 and a $1.05 bn placement of senior secured notes which will mature in 2025 (Casino.org 2020).  The total new debt they will be acquiring is around $6bn. Underwriters are also readying $7.2 bn of bonds that include a mix of Eldorado and Caesar obligations. This included leveraged loans obligations, which are back 90 cents to the dollar, according to Bloomberg data.

Eldorado is using leveraged loans to raise capital because they already have very high debt burdens (Casino.org 2020). Thus lenders deem their new corporate debt sale to be risky because of the elevated default risk. Banks looking to purchase these bonds have recently negotiated so that they can shift some of the leveraged debt to senior secured bonds, which means that in an event of a default, secure bond holders have seniority over other debt obligations and will be compensated before leveraged loan investors.

Following the transaction, the combined company will take Caesar’s name- Caesar Entertainment Corp. Eldorado shareholders will own 51% of the combined company, whilst the original Caesar shareholders will take a 49% stake. The new board of directors of the combined company will have 11 board members, with six coming from Eldorado and five coming from Caesar (Financial Times, 2020).

The financial advisors serving Eldorado in this deal are JP Morgan, Credit Suisse and Macquarie Capital; the legal counsels are Milbank LLP and Latham & Watkins LLP.  For Caesar Entertainment, PJT Partners LP serve as the financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP serve as legal counsel (Market Watch, 2020; Hotel Business, 2020).

Regulatory Approval

In June 2019, the merger between Eldorado Resorts and Caesars Entertainment was announced to create the largest casino company in the US. Following this, approval from shareholders, the Federal Trade Commission (FTC) and regulatory bodies from the 16 states in which the merged company will operate was required in order to close the deal.

In the US, all states have a legislative branch which allows them to determine state specific regulation. With different regulatory bodies, Eldorado’s ability to gain approval faced different levels of difficulty from state to state. The main concern that regulators often cited, or considered, was the formation of a local market overrun with post-merger venues. In states such as Pennsylvania, there were no concerns about regulators (including the Pennsylvania State Horse Racing Commission) signing off the deal given that Caesars owned one venue and Eldorado didn’t own any . Many of the state regulatory approvals followed a similar, mundane, process with 14/16 states approving the merger by July 2020 – leaving Indiana and New Jersey left to approve the deal (Gibbs, 2020b).

Regulators in Indiana approved the deal with the condition that the merged company unload three of its properties by 2021. This follows competition concerns as the merged company would own five venues in the state, controlling 60% of its revenue (Gibbs, 2020d). New Jersey regulators had similar concerns as the resultant entity would own four out of nine casinos in Atlantic City post-merger (Gibbs, 2020c). Although economists indicated competition would not be affected by the deal, Eldorado has agreed to release the deed controls on certain Caesars assets and spend up to $400 million to update several Garden State casinos. That figure would be increased by $125 million if Twin River Worldwide can’t take possession of Bally’s, a separate deal that is already in the works (Gibbs, 2020d).

With approval from New Jersey and Indiana regulators, the deal will go ahead (Gibbs, 2020a). But let’s imagine the deal was not signed off. The negotiations and efforts of Eldorado Resorts and Caesars Entertainment would then have yielded nothing, highlighting the implications of state legislation and decentralised power in the US. Moreover, the unprecedented outbreak of the coronavirus this year has led to widespread closures of hotels and casinos – some of which still remain closed – and might also cause Eldorado and Caesars to rue the efforts put into sealing the $17.3 billion cash-and-stock deal. Thus the threat of large levels of debt, which the leveraged buyout of Caesars intended to reduce, would pose drawbacks for Eldorado Resorts who would have assumed Caesars’ debt, issued new debt, and now may face rising liabilities on its balance sheet as its hotels and casinos  come under significant complications.

Definitions

Activist investor– An activist investor is an individual or group that purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board to effect a significant change within the company.

Bankruptcy protection–  Introduced in 1978, a Chapter 11 proceeding under the U.S. Bankruptcy Code allows a company or individual to declare bankruptcy, reduce debt and reorganize without having to shut down and liquidate to satisfy debts.

Cash-and-stock deal– An all cash, all stock offer is a proposal by one company to buy another company’s outstanding shares from its shareholders for cash.

Enterprise value– A measure of the company’s total value. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet.

Lease-adjusted leverage ratio– the ratio of (a) the sum of (i) Funded Debt as of such date and (ii) Third Party Rent for the twelve (12) month period ending on such date multiplied by eight (8), to (b) the sum of EBITDA and Third Party Rent for the twelve (12) month period ending on such date.

Leverage ratio– a financial ratio that indicates the debt incurred by a business entity and provide an indication of how the company’s assets and business operations are financed (using debt or equity). It is the value of total liabilities divided by total assets.

Liabilities– anything of value that is owed.

Senior secured note – A secured note is a type of loan that is backed by the company’s assets. Owning senior secured notes means that in the event where the company files bankruptcy, the owner will be compensated before other debt holders.

Common stock- Ordinary shares in a company.

Share outstanding- Number of shares that are currently owned by all shareholders of the company.

References:

Businesswire (2018) Eldorado Resorts Completes Tropicana Entertainment Acquisition. [Online]. Available at https://www.businesswire.com/news/home/20181001005871/en/Eldorado-Resorts-Completes-Tropicana-Entertainment-Acquisition.

[Accessed 18 August 2020].

Caesars Entertainment (2020) Eldorado Resorts and Caesars Entertainment complete Merger. [Online]. Available at https://www.caesars.com/corporate/newsroom/press-releases/eldorado-resorts-and-caesars-entertainment-complete-merger.

[Access on 11 August 2020].

Fontella-Khan, J.F.K. (2019) Caesars Entertainment moves closer to deal with El Dorado [Online]. Available at

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Gibbs, E. (2020a) Regulator approvals of Caesars/Eldorado continue to arrive. [Online]. Available at:https://calvinayre.com/2020/01/31/casino/regulator-approvals-of-caesars-eldorado-continue-to-arrive/ [Accessed on 10 August 2020].

Gibbs, E. (2020b) New Jersey has trouble approving Eldorado/Caesars merger. [Online]. Available at:https://calvinayre.com/2020/07/17/casino/new-jersey-has-trouble-approving-eldorado-caesars-merger/ [Accessed on 10 August 2020].

Gibbs, E. (2020c) Indiana regulators say yes to Eldorado/Caesars deal, with a catch. [Online]. Available at:https://calvinayre.com/2020/07/13/casino/indiana-regulators-say-yes-to-eldorado-caesars-deal-with-a-catch/ [Accessed on 10 August 2020].

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[Accessed on 12 August 2020]

Schriber (2020) Eldorado Closer to Caesars Finish Line as Banks Prep Critical $7.2 Billion Bond Offering [online]. Available at: https://www.casino.org/news/eldorado-bond-sale-is-big-step-in-completing-caesars-deal/

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