Analyst: Odds Looking Good for Eldorado Resorts to Buy Caesars Entertainment

The possibility of Eldorado Resorts, Inc. (NASDAQ: ERI) acquiring Caesars Entertainment Corp. (NYSE: CZR) is increasing, according to a gaming and lodging analyst.

“We believe the likelihood for an ERI/CZR pairing has increased and we believe this transaction would be a net positive for ERI, CZR, and the gaming group more broadly, given the valuation implications and broader halo of a busy (mergers and acquisitions) environment,” said Deutsche Bank analyst Carlo Santarelli in a note out Wednesday.

News of Eldorado’s interest in Caesars was first revealed in March when it was reported that the regional casino operator and Caesars were in preliminary discussions.

Big Win for Caesars Shareholders

Assuming Reno-based Eldorado moves forward with a bid for Caesars, the former could offer up to $10.50 per share for the operator of Caesars Palace, Bally’s, and Paris, among other Las Vegas properties, according to Santarelli.

That represents a premium of 14.8 percent from where shares of Caesars closed on Wednesday, but when factoring in the equity element of what is likely to be a stock and cash offer, Caesars investors, which include some of Wall Street’s biggest names, could see a windfall.

We estimate, based on what we believe to be leverage thresholds and synergy targets, that ERI would likely offering something in the range of a ~55/45 cash/stock deal,” the Deutsche Bank analyst said. “As such, and assuming our ERI pro forma target objective of $83, we believe the transaction, over time, could represent a greater than 40 percent return for CZR holders.”

Santarelli has “Buy” ratings on both Caesars and Eldorado. The analyst has a price target of $56 on Eldorado and a forecast of $11 on Caesars.

Should Eldorado reveal a formal offer for Caesars, it could be a sign that regional operator is making progress on its efforts to get its target to rein in spending. Earlier this month, it was reported that if Eldorado lands Caesars, it would look to make significant spending reductions, including up to $500 million in staff expenses.

“In short, for ERI, we think a transaction of this type is purely one of financial merit, and nothing more, for ERI,” said Santarelli. “We believe, much like ERI has done with prior transactions, if management believes it can garner appropriate synergies and drive shareholder value, it will act, and, as such, we put a strong probability on an ERI/CZR transaction.”

Eldorado Not Alone

Eldorado is not the only party interested in Caesars. Billionaire Tilman Fertitta, the owner of the Golden Nugget and the NBA’s Houston Rockets, previously made an offer for Caesars that was ultimately rejected. Fellow billionaire Phil Ruffin, owner of Treasure Island, recently said he is interested in buying Caesars, too.

Legendary activist investor Carl Ichan, who owns 28.5 percent of Caesars shares, has been pressuring the company to reduce costs and sell.

If Eldorado and Caesars do make it the acquisition altar, the deal, if consummated, could result in some asset sales in markets where the combined company could have such dominating footprints that regulators could be concerned about anti-trust issues.

Santarelli highlighted Missouri as the most likely state for a combined Eldorado/Caesars to unload assets because, if the casino operators come together, they would own six of the 13 licenses in the Show Me State. The analyst also mentioned the possibility of small asset sales in Reno and Laughlin, Nev., as well as the potential for divestments in Lake Tahoe and Louisiana, though in the case of those two markets, parting with properties there would be “largely immaterial,” said Santarelli.