Eldorado, Caesars Entertainment Merger Agreement Outlines Penalties for Breakup

Posted on: June 25, 2019, 10:26h. 

Last updated on: June 25, 2019, 11:43h.

Soon after announcing a $17.3 billion plan to merge, Eldorado Resorts, Inc. (NASDAQ:ERI) and Caesars Entertainment Corp. (NASDAQ:CZR) made clear in a regulatory filing that if the deal does not go through, a breakup could be costly for either side.

Eldorado Resorts CEO Tom Reeg before the New Jersey Gaming Commission last September. His company is looking to merge with Caesars. (Image: Associated Press)

In a Form 8-K filing with the Securities and Exchange Commission (SEC), the two companies detail the costs they would have to pay to the other if one side decides to scuttle the proposed combination.

If another suitor comes along and makes the operator of Caesars Palace a better offer or if the company’s board for some reason does not approve the marriage with Eldorado, Caesars Entertainment would be required to pay Eldorado $418.4 million, according to the filing.

Likewise, if regional gaming company Eldorado has second thoughts and does not want to proceed with the deal, the Reno-based company would have to pay Caesars $154.9 million.

Behind Breakup Fees

Also known as termination fees, breakup fees are commonplace in mergers and acquisitions. Typically, these penalties are used to compel the seller, in this case Caesars Entertainment, to hold up their end of the bargain and not seek another suitor.

However, it is common for termination agreements to include clauses that could potentially penalize the buyer if the transaction is not consummated. As is seen in the Eldorado/Caesars example, termination fees are usually lower for the acquiring company than the target.

Though it involves another industry, there is a recent, real world example that illustrates applications of termination fees. Earlier this year, Chevron Corp. (NYSE: CVX) made a move to acquire Anadarko Petroleum Corp. (NYSE: APC). Later, Occidental Petroleum Corp. (NYSE: OXY) would swoop in and make a higher offer for Anadarko.

Anadarko moved forward with Occidental, meaning the former will pay Chevron a $1 billion “divorce” fee. Chevron investors won in that deal because the company said it will boost its 2019 share repurchase program by 25 percent with that $1 billion.

Interestingly, Carl Icahn, Caesars’ largest shareholder, is involved with the Anadarko/Occidental deal, too. In fact, the billionaire financier used a statement issued yesterday in which he lauded Caesars management to deride Occidental.

“The recent Occidental Petroleum fiasco is a great example of how CEOs and boards will go to great lengths, including ‘betting the company’ to serve their own agendas,” Icahn said in the release. “If their bet is successful, they and possibly their shareholders win, but if it is unsuccessful, only the shareholders lose.”

Other Clauses

There are some other points in the Eldorado/Caesar breakup pact that make it costly for either side to back out of the relationship.

“Each party will be obligated to reimburse the other party’s expenses for an amount not to exceed $50 million if the Merger Agreement is terminated because of the failure to obtain the required approval of such party’s stockholders,” according to the SEC filing.

There are also some issues that could force Eldorado to pay Caesars a whopping $836.8 million if the merger is terminated. Those include, from the filing, the deal collapsing “(i) due to a law or order relating to gaming or antitrust laws that prohibits or permanently enjoins the consummation of the transactions, (ii) because the required regulatory approvals were not obtained prior to the End Date or (iii) due to Parent willfully and materially breaching certain obligations with respect to the actions required to be taken by Parent to obtain required antitrust approvals.”

Essentially what is being said there is that Eldorado would be on the hook for a big chunk of change if the company does not perform its due diligence, such as identifying markets where regulators might be concerned about antitrust issues stemming from potential dominant positions held by the combined Eldorado/Caesars.

To that end, Eldorado already announced the sale of three Harrah’s properties to VICI Properties Inc. (NYSE:VICI) on Monday and it is expected more asset sales could be coming.