The shape of things to come: In accepting Tilman Fertitta’s $31-a-share offer, Caesars Entertainment could spark a transformational round of M&A that could have ramifications for major Las Vegas Strip rival MGM Resorts.

• The deal announced yesterday would see Fertitta Entertainment pay ~$5.7bn and assume $11.9bn of Caesars’ debt, bringing the total value to ~$17.6bn.
• It is priced at ~7.5x estimated 2026 EV/EBITDAR and 7x the 2027 estimate, while Jefferies said it was worth ~4.6x its 2027 adj. EBITDA estimate.
• The $31-a-share offer is 49% above the prevailing share price when news about talks leaked in February.

All you can eat: Truist pointed out that the combination would be a “large, diversified” business with 60 domestic casino resorts, OSB/iCasino, retail sports betting at more than 200 third-party locations and 550-plus Fertitta Entertainment outlets, including more than 450 Landry’s restaurants.

• The joint loyalty programs would also have an expanded footprint, enabling access across Las Vegas and dozens of smaller local markets, the analysts added.

On the chopping block: A fortnight ago, ahead of the announcement that agreement had been reached, the analysts at JP Morgan said that combining the Caesars portfolio of casinos with those of Fertitta’s Golden Nugget business would necessitate “forced and opportunistic” asset sales.

• Of the eight Golden Nugget casinos, JP Morgan said there was overlap with Caesars properties in Vegas, Lake Tahoe and Laughlin in Nevada; Lake Charles, Louisiana; Atlantic City, New Jersey; and Biloxi, Mississippi.
• Properties in Cripple Creek, Colorado, and Danville, Illinois, have minimal overlap, they argued.

ONO: They added that they believe all of the Golden Nugget casinos are wholly owned, but many of Caesars’ casinos in overlapping markets are leased, thus are “more difficult and less lucrative to sell.”

• Totting up the potential sales, the team suggested there might be ~$2.5bn to be found from selling Circus Circus Reno, Eldorado Reno, Horseshoe Lake Charles, Golden Nugget AC and/or a property in Las Vegas.
• Potential buyers identified by Truist include the cash-rich Boyd Gaming and Monarch.
• The team at Macquarie said: “Strategically, this deal could act as a catalyst for broader M&A across the regional gaming landscape.”

Out on the floor: However, it is MGM Resorts where the analyst spotlight immediately falls. Like Caesars, its shares have been laid low for much of the past year over fears about the downturn in Vegas.

• But the multiples involved in the Caesars takeout appear to provide a floor on US gaming valuations, suggested Stifel.
• It could “give investors a reason to become more focused on free cash flow generation versus just earnings momentum,” the team added.
• They said that based on the 7.5x multiple, MGM could be worth ~$55 a share vs. the current $43 level, representing a 28% discount.

Mr Brightside: The Truist team was even more bullish, suggesting the deal multiples imply a share price closer to $69. The analysts this week issued a Buy note on MGM, arguing that recent consumer surveys suggested the pessimism over the Strip’s near-term attractiveness was overdone.

• “Barring worsening geopolitical/macro noise, we see the potential for upside revisions to Street earnings estimates,” the team wrote.

Don’t ask what iCahn do for you: Truist went on to say that MGM is “well positioned” to gain market share in the event of any disruptions given a lengthy Caesars/Fertitta deal closing.

• Caesars said yesterday that no financing was needed for the deal, with 10 banks lined up to assume the debt financing.
• But regulatory approvals would be needed and there is a ‘go-shop’ provision in place until July for any further potential bids.
• Macquarie said the possibility of an “interloper” getting involved was low, although, as Stifel noted, the attitude of Carl Icahn, a major Caesars shareholder, towards the deal is unknown.
• Further questions come from Fertitta’s stake in Wynn, where at 11% he is currently the largest shareholder.

Spinning wheel: Another consideration is whether the new ownership might consider a different path for Caesars’ digital operations. A spin has previously been one of the potential avenues spoken about by Caesars’ current management and the analysts believe the new owners might look at this as an option to raise further cash to pay off a portion of the debt.

Like what you are reading? CLICK here to read the FULL article!