Caesars Holdings (NASDAQ: CZR), which is the name of the merged Eldorado Resorts and Caesars Entertainment, could not have completed its leveraged purchase at a worse time. The coronavirus pandemic is causing casinos across the country to burn hundreds of millions of dollars a month, and it is unclear whether there will be a recovery in demand this year.
Official data has yet to be released, but estimates of JP Morgan and Visitdata.org show that traffic to casinos has decreased about 40% since it reopened in early June. That does not bode well for traffic until a COVID-19 vaccine is launched or some other type of solution is found to take visitors to casinos across the country. However, Caesars is piling up debt to grow, and that could lead to the same mistake his legacy company Harrah’s made over a decade ago.
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Big bet on the United States game
To finance the acquisition, Caesars Holdings assumed a debt of $ 15.5 billion. That may have seemed manageable before the pandemic, when management expected a property EBITDA of $ 3.6 billion, a proxy for the cash flow of the resorts (which includes $ 500 million in expected synergies). But that is great leverage in a good economy, and the pandemic could leave the company in a much worse financial position.
The last time an acquisition of this size was made in the gaming industry, it was the $ 28 billion purchase of Harrah’s Entertainment, the predecessor to Caesars. That deal resulted in the bankruptcy of Caesars’ largest subsidiary after years of financial struggles and complex financial engineering, though it did not ruin the parent company due to a complicated financial move. But that bankruptcy occurred during a growing economy without a pandemic.
Investors granting debt financing to the latest deal should be confident that the company can re-form once the coronavirus is overcome, but that’s a risky bet, no matter how you look at it.
A recession can hurt businesses for a long time
What concerns me most about Caesars’ new business is the regional gambling market on which it now depends. A recovery in Las Vegas is one thing, but the regional casinos that dominated the Eldorado properties and accounted for more than half of Caesars’ previous revenue merger will now be the engine of business.
While Las Vegas is fueled by party goers, corporate events, and high rollers, regional casinos aren’t all that flashy. They count on the locals to spend some extra money over the weekend or take a short vacation at their properties. And they’re not so focused on the high rollers and VIPs who run the Las Vegas Strip.
The problem with the regional approach is that 51 million Americans have been out of work since the pandemic began and many of those jobs will not return. Restaurants are closing permanently, service jobs are shrinking, and retail jobs are likely to decline even after the pandemic ends. And there may not be a stimulus package or increase in unemployment benefits to keep these consumers spending money. I think a very long recovery awaits us for those jobs, and that could have a big effect on regional casino revenues.
Even if revenue is down a modest 5% to 10% from pre-pandemic levels (which I think is conservative), the impact on Caesars’ cash flow and EBITDA will be much worse due to leverage in the business from casinos. And as I noted earlier, that leverage is high after this purchase, so there is a lot of risk to Caesars.
Avoid this bet
The fact that Caesars has bankruptcy experience after a purchase is a warning sign for me. I think right now, you have taken on too much debt and have too much leverage in your trades to bet on stocks. Even when visitors return to their resorts, Caesars faces great difficulties in preventing another financial catastrophe.
