Analysts Say ‘Low’ Caesars Buyout Will Lift MGM, Ignite Casino Dealmaking

• While Tilman Fertitta’s $31-a-share cash offer represents a significant premium over earlier trading, analysts argue it still undervalues Caesars’ long-term footprint
• Low or not, the $17.6 billion enterprise deal establishes a firm valuation floor for domestic casino operators, resetting expectations for the sector
• The transaction acts as a major constructive catalyst for peer stocks like MGM Resorts, while signaling the first wave of a broader industry consolidation

Tilman Fertitta’s namesake entertainment empire has agreed to acquire Caesars Entertainment (NASDAQ: CZR) in a $17.6 billion take-private deal—though at least one Wall Street analyst argues the $31-per-share price tag undervalues the casino giant.

The $17.6 billion purchase price includes the assumption of $11.9 billion in outstanding Caesars debt. The remaining equity portion values the company at $31 a share, representing an 8% premium to yesterday’s close and a 49% premium to its unaffected share price on February 26, before the parties entered exclusive negotiations.

Stifel analyst Steven Wieczynski argues that Caesars shareholders have every right to be disappointed with the $31 price tag. The sentiment follows weeks of unconfirmed market speculation that Fertitta was preparing a $34-per-share offer, and that billionaire activist Carl Icahn had floated a competing bid just under that mark.

If we were long-time CZR shareholders, a $31/share wouldn’t be overly appealing, and we would be super irritated,” wrote the analyst in a report to clients today. “We believed a multiple closer to 8x would be more fair for CZR, which would imply a takeout price closer to $35.”

He adds that there’s more value in Caesars than Fertitta’s takeover offer implies and that on a sum of the parts basis, the target is undervalued.

“If the company was split up with the help of private equity the shares were/are extremely undervalued, in our view,” said Wieczynski.

In Caesars Takeover, Silver Lining for MGM

While the Caesars takeover price may be on the low side, there are positive implications for the industry at large and MGM Resorts International (NYSE: MGM) — Caesars’ most direct competitor on the Las Vegas Strip.

Wieczynski says that one of the positives to emerge from the Fertitta/Caesars deal is that it’s likely to “put a floor on other U.S. gaming valuations, specifically MGM” while compelling investors to focus more on operators’ free cash flow (FCF) generation and less on near-term earnings momentum.

“Based on a 7x EBITDAR takeout price (and looking at ~15% FCF yield), we believe this signals MGM shares could be worth $50-$55/share versus the current ~$42 share price,” observes the Stifel analyst.

Caesars Takeover Stoke Regional Casino Consolidation

As has been widely documented, there’s considerable overlap in some markets between Caesars and the Fertitta-owned Golden Nugget Casinos. That could lead to forced and voluntary asset sales, potentially ushering in new wave of mergers and acquisitions activity among regional casinos.

Jefferies analyst David Katz points to regional assets controlled by Boyd Gaming (NYSE: BYD), Churchill Downs (NASDAQ: CHDN), MGM, Monarch Casino & Resort (NASDAQ: MCRI) and Penn Entertainment (NASDAQ: PENN) “emerging as potential medium-term candidates.”

Some analysts surmise that’s merely a matter of time before Caesars or Golden Nugget unload some of their current portfolio pieces.

“Notably, the combined entity may also look to optimize the portfolio post-close, including potential asset sales or divestitures, particularly within overlapping regional or non-core segments, to drive deleveraging and returns,” said Macquarie’s Chad Beynon in a client note.