Analyst Says Caesars’ Debt Could Derail Merger with Eldorado

A Morningstar analyst believes that Caesars Entertainment Corp. will only gain a marginally better competitive position from its $17.3 billion merger with Eldorado Resorts and that the Las Vegas casino giant’s piles of debt raise uncertainty about the tie-up.

The analyst’s comments come shortly after Eldorado CEO Tom Reeg injected optimism about the mega-deal, saying that his company would be able to close it by the end of June, as it was originally anticipated, despite the coronavirus-linked slump in the two casino operators’ financials.

RELATED: Eldorado CEO Injects Optimism about Caesars Merger, Despite Pandemic-Linked Slump

Dan Wasiolek, senior equity analyst at Morningstar, said in a recent note to investors that they see risk to Eldorado “obtaining funding needed to close on its proposed acquisition of Caesars, considering Caesars and Eldorado’s high balance sheet leverage, as the coronavirus’ material impact on leisure and travel demand creates heightened uncertainty.”

Caesars and Eldorado shut down temporarily all their properties across the United States in March in the face of the Covid-19 pandemic. But as more and more states start to ease pandemic-related restrictions, the two companies, along with all other US-facing casino operators, are gearing up preparations to reopen or have even reopened some of their properties.

As a result from the nationwide casino closures, Caesars shares have gone down about 21% year-to-date, while Eldorado’s have slumped 48% since the beginning of the year. The latter company reported operating loss of $123.2 million in the first quarter of the year.

Caesars to Benefit Only Marginally from Deal

According to Wasiolek, the pending $17.3 billion merger would roughly double Caesars’ properties around the US to 60 and increase its loyalty membership to 65 million from 55 million, “resulting in a marginally improved competitive position.”

The analyst said that Caesars will likely keep its market share in “lower-growth, lower-barrier Las Vegas” as the company continues to renovate its properties along the Las Vegas Strip and is set to open its Caesars Forum convention center later this year.

Wasiolek also noted that demand for casino gaming in the US is significantly lower than in Asian markets like Macau and Singapore, where “the propensity to gamble is much higher”. In addition, competition in the US is set to grow in the coming years with two integrated resorts being set to open doors in Las Vegas, including the multi-billion Resorts World Las Vegas property.

The Morningstar analyst pointed out that he sees a “low probability of Caesars gaming license exposure to higher-ROIC oversees markets that have higher barriers of entry, as we expect only a few such opportunities to become available with the winners likely being operators with stronger operational track records.”

Last year, Caesars abandoned its plans to compete for one of three casino licenses in Japan, saying that it wanted to prepare for its merger with Eldorado and to focus on its domestic operations. In addition, Caesars is the only major Las Vegas integrated resort operator that does not run a property in Macau, with Las Vegas Sands, Wynn Resorts, and MGM Resorts International all being among the six concessionaires and sub-concessionaires authorized to operate in the world’s largest casino hub.

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