Eldorado Resorts A ‘Must-Own’ Heading Into 2020, Caesars Deal Cost Savings Could Top Estimates, Says Analyst
Posted on: October 16, 2019, 08:47h.
Last updated on: October 16, 2019, 11:29h.
Eldorado Resorts, Inc. (NASDAQ:ERI) is a “must-own name” heading into next year, and the company’s goal of trimming at least $500 million in costs via its $17.3 billion takeover of Caesars Entertainment Corp. (NASDAQ:CZR) can be met and probably topped, according to Stifel analyst Steven Wieczynski.
Shares of the regional gaming operator were drubbed following the June announcement of the acquisition offer for Caesars, and while Eldorado stock remains 23 percent below its 52-week high, there have recently been signs of life, as the name has rallied nearly 10 percent over the past month.
Wieczynski believes investors “continue to sit on the sidelines” regarding Eldorado stock, waiting for certain milestones in the Caesars deal to be achieved. The analyst did not identify specific landmarks, but he did say market participants could revisit Eldorado shares as the deal nears completion, something he forecasts as happening in February or March.
Once investors start to understand the strength in the free cash flow (FCF) generation of the combined entity, at that point, we believe the equity will start to rerate,” said the Stifel analyst. “We believe the market is dramatically discounting the potential value creation resulting from a successful CZR integration.”
Investors from both companies are scheduled to meet in Nevada next month to vote on the transaction. Following that, regulators in some states, namely New Jersey, are expected to examine Eldorado’s buyout of Caesars to ensure the combination isn’t anti-competitive and doesn’t present geographic concentration risk.
Eldorado management has long targeted $500 million in savings through the Caesars acquisition, a number some on Wall Street have voiced skepticism about. Wieczynski views that goal as not just achievable, but beatable.
“Though some investors have concerns over the achievability of management’s $500M synergy target, we actually believe upside to the target could emerge in relatively short order,” said the analyst.
He adds that Eldorado’s move to sell three Harrah’s venues to Vici Properties Inc. (NYSE:VICI), announced the same day as the Caesars offer, is a “significant value unlock” and the magnitude of those sales appears to be “lost on ERI’s equity investors.”
On Tuesday, MGM Resorts International (NYSE:MGM) announced a sale-leaseback deal for the Bellagio Blackstone Group Inc. (NYSE:BX) for $4.25 billion and the sale of Circus Circus to Phil Ruffin for $825 million.
Wieczynski believes those deals could provide a template for Eldorado, should it move forward with selling one or two of Caesars’ Strip properties.
“Most importantly, if you looked at what MGM just sold its Circus-Circus asset for, and the land under Bellagio for, you would have to say ERI is in a great position to monetize one, maybe even two, possible Strip assets at some point in the near future,” said Wieczynski.
Eldorado has not identified specific Strip assets that could be sold. But as part of the aforementioned agreement with Vici, the real estate company has rights of first refusal should the Flamingo Las Vegas, Bally’s Las Vegas, Paris Las Vegas or Planet Hollywood Resort & Casino come up for sale.
If Vici acquires one of those venues, it would also have initial bidding rights for another transaction involving the remainders of that group and the LINQ Hotel & Casino.
Wieczynski reiterated a “buy” rating on Eldorado stock, but slightly reduced his price forecast on the name to $57 from $58.