Eldorado’s acquisition of Caesars may be in trouble due to coronavirus

By: Josh K.

The casino industry’s largest merger of the year is becoming a game of dice, thanks to coronavirus.

Early last summer, a fast-growing casino empire rolled the dice on a debt-fueled acquisition of Caesars Entertainment. Now, the big, risky bet is getting hammered by the coronavirus.

Eldorado Resorts — an acquisitive chain of gambling houses that includes the Tropicana, as well as middlebrow names like Circus Circus, Lady Luck and Isle of Capri — agreed in June to buy Caesars Entertainment in a heavily financed deal worth $17.3 billion.

Critics note that the deal — which will create a casino colossus carrying more than $21 billion in debt — looks disconcertingly similar to a 2008 leveraged buyout of Caesars by the private-equity firm Apollo Global Management, which landed Caesars in bankruptcy court seven years later.

Despite those worries, sources say Eldorado’s hard-driving boss, Tom Reeg, has been pressing to close the merger, which had been aggressively pushed for by billionaire Carl Icahn, a big Caesars shareholder.

That’s partly because of the ironclad terms of the deal. Public filings show Eldorado can’t use “public health emergencies” to get out of the merger unless they hit Caesars harder than the rest of the gaming industry — a case that would be hard to make, sources said.

Nevertheless, insiders say Reeg appears to be doubling down with a gambler’s zest — and all of Las Vegas will be watching to see how he plays his hand.

“I actually think they are doing everything to close this as soon as possible,” according to one source close to the merger talks.

Shares tanking 

On Friday — just one day after Nevada reported its second coronavirus case — Eldorado held a board meeting to discuss the merger, and directors agreed to close on the deal as planned as soon as April 11, sources close to the situation said.

On Monday, Eldorado’s shares plummeted 21 percent during a stock-selling frenzy that sent the Dow Jones industrial average down more than 2,000 points. On Wednesday, the stock hit a 52-week low of $22.91 before closing 15 percent lower at $24.77.

Part of the concern is that Sin City has been hit with a slew of event cancellations.

On March 2, the Adobe Summit at the Venetian, which had been expected to draw 22,000 guests later this month, was canceled. That was only a few days after Google scrapped a company sales and marketing event that was slated for Las Vegas in late March.

“Google started a tsunami,” a top rival casino executive said.

Indeed, gamblers can now place bets through PokerShares over whether the World Series of Poker Tournament — running from May 26 through July 15 at Caesars — will be canceled.

“My sense is you will have massive cancellations,” the rival casino executive said, referring to all Strip casinos.

Room rates on the Las Vegas Strip were down last week by 20 to 30 percent, according to a Thursday analyst report by SunTrust Robinson Humphrey. And that was before the World Health Organization declared the viral outbreak a pandemic.

Repeat of history? 

To many Vegas insiders, the situation looks eerily similar to 2008, when the buyout firm Apollo, headed by billionaire Leon Black, teamed up with TPG Capital to take Caesars private in a deal that saddled the casino with $25 billion in debt.

After the deal closed, Caesars’ revenue had dropped 20 percent in 2009, at the height of the Great Recession, from its 2007 peak, paving the way for losses that forced the company into Chapter 11 in 2015 despite several refinancings.

Now, with the virus raging, one gaming expert who advises private clients told The Post he projects that Las Vegas Strip revenue will fall 15 to 20 percent over the next 12 months.

A second gaming analyst who crunched the numbers for The Post projects that if revenue for Eldorado’s casinos falls by 15 percent — along with a 20 percent drop at the much larger Caesars — the chain could be on track to lose $300 million a year.

That’s assuming an estimated $400 million of synergies, according to the analyst who asked not to be named, saying he is skeptical of Eldorado’s $500 million cost-savings target.

A revenue dip could crimp the newly combined company’s ability to pay down the roughly $21 billion in debt it will have assumed in the merger. That includes $7 billion in fresh loans to fund the deal, which will likely be extended by adviser JPMorgan Chase and Credit Suisse, which are facing a dried-up debt market.

“How much do earnings go down and can they service the debt?” a former Caesars top executive said. “These are legitimate concerns.”

The banks can’t get out of the deal and will likely try to resell the loan in the coming weeks, with New Jersey Division of Gaming Enforcement expected to approve the merger April 11.

But the banks have halted their pitches in the meantime as Eldorado’s shares tank, sources said. And the outlook for syndication is iffy: The value of a $4.7 billion Caesars loan, which matures in late 2024, had dipped to 90 cents on the dollar earlier this week, according to TreppWire, which suggests investors are questioning the company’s ability to repay existing loans.

Icahn’s profit takes hit 

On Tuesday, the inevitability of the deal sank in further as Eldorado announced it has entered into an agreement to sell the Montbleu Resort Casino & Spa in Lake Tahoe, clearing the way for the Nevada Gaming Commission to clear the Caesars merger on or before April 11.

Icahn, for his part, has also seen his profit on the cash-and-stock deal take a hit, although he’s poised for a payoff. The corporate activist paid about $900 million for his 15.6 percent stake in Caesars starting in December 2018. Since the deal was struck in June, Icahn’s profit has fallen from roughly 50 percent to 30 percent as Eldorado’s shares have tumbled.

Despite the company’s crashing stock, Eldorado is putting on a brave face. An Eldorado spokesman said that even in a bad scenario there are levels of protection.

Eldorado as part of the financing will have a $2 billion revolving line of credit. It also has the right to sell real estate to Vici Properties at a fixed price of more than $2 billion.

And CEO Reeg, who has been with the company since 2007, is credited with helping to turn it from a small family-run chain into what now is becoming a colossus. In 2014, Eldorado merged with MTR Gaming gaining facilities in Ohio, Pennsylvania, and West Virginia.

The next year, Eldorado bought Circus Circus Reno, and in 2017 Isle of Capris Casinos and its 13 properties. The next year it bought Carl Icahn’s Tropicana Entertainment and its seven properties. Now, however, many insiders wonder whether his wager against the coronavirus will be his last.

“We experienced in 2009 that the world can do some pretty strange things,” a former Caesars executive who weathered the company’s previous bankruptcy told The Post. “And high leverage limits your options.”