Following News of Caesars Entertainment Deal, Eldorado Resorts Earns Analyst Upgrade

Posted on: June 25, 2019, 04:19h. 

Last updated on: June 25, 2019, 04:19h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Sparked by news of the effort to acquire Caesars Entertainment Corp. (NASDAQ:CZR), shares of Eldorado Resorts, Inc. (NASDAQ:ERI) earned an upgrade from Wolfe Research.

The Flamingo Las Vegas, owned by Caesars, which is being acquired by Eldorado. (Image: Las Vegas Casino Central)

In a note out Monday, the day the deal for Caesars was announced, Wolfe Research analyst Jared Shojaian upgraded Eldorado to “outperform,” the equivalent of a “buy” rating. Shojaian has a $65 price target on Eldorado, well above Tuesday’s closing price $43.81.

In the two trading days since the regional gaming company’s combination with Caesars became public, shares of Eldorado have tumbled nearly 17 percent. It is not unusual for the buyer’s stock to fall when mergers and acquisitions are announced, but some on Wall Street are concerned that the $17.3 billion Eldorado is shelling out for Caesars is too hefty of a price tag. That is more than quadruple the Reno-based company’s market value of $4 billion on Friday, June 21, the last trading day before the merger was revealed.

We thought the terms and synergies were favorable and we use today’s weakness as an opportunity to upgrade the stock,” said Shojaian in the note. “Valuation is attractive, we see upside to the synergy target, and we believe in this management team to execute given their track record.”

The Wolfe Research analyst points out that most industry observers assumed Eldorado would not pay more than $12 a share for Caesars, but the offer came in at $12.75, likely explaining Eldorado’s tumble on Monday.

Cash And Synergies

“Synergies” is Wall Street speak for ways a combined company will find ways to reduce costs following a merger, something that has long been seen as tantamount in Eldorado’s quest for its Las Vegas-based rival.

For months prior to the formal deal announcement, reports swirled that Eldorado would only move on the operator of Caesars Palace, Bally’s and the Flamingo if it could find a way to reduce costs by at least $500 million. That is in fact the amount of “synergies” forecast by Shojaian.

The analyst believes the combined Eldorado/Caesars could be a cash cow, a free cash flow cow, to be specific. (For more on free cash flow, view this article).

“ERI’s stated pro forma free cash flow by around 2021 equates to a staggering 21% free cash flow yield,” said Shojaian. “For simplicity, if we take our near-term standalone ERI + CZR 2020 EBITDA estimates and assume no synergies, then the yield would still imply 11%.”

In plain English, the analyst is saying on its own, Eldorado is proficient at generating free cash flow, combining with Caesars aids in that objective and that the deal will boost the regional operator’s earnings.

Risks To Consider

While Eldorado may be paying a steep price for Caesars, the transaction brings the company into the lucrative Las Vegas market for the first time, but there are some risks associated with a combination that will create one of the largest US gaming companies.

Shojaian said that the combined company, led by Eldorado management, will attract new shareholders, but there may selling by short-term and “non-traditional” investors in the immediate future and that given the leverage (debt) associated with the deal, Eldorado is unlikely to repurchase any of its own stock “for a few years.”

Even with those factors in mind, the analyst said, “ERI is now our top idea in the gaming sector.”