Question of the Day - 16 November 2018

[Editor's Note: This answer is courtesy of David McKee, long-time Las Vegas journalist and writer of the "Stiffs & Georges" blog on this website.]

First, the easy answer: A higher stock valuation is the carrot that Fertitta reportedly dangled in front of Caesars Entertainment. Always a “cocktail-party stock” that traded in the low teens, it bounced to $10.40 when Reuters reported the possible Landry/Caesars deal. Fertitta was said to be offering $13 per share, but CZR has always traded below its IPO price and the Landry’s offer would have allowed it to exit the stock market with a measure of dignity.

“While there are more questions than answers … we believe the overarching takeaway is that strategic and financial buyers recognize the seemingly silly valuations most operators have traded to in the recent swoon (positive for all operators, especially domestic centric ones),” wrote JP Morgan analyst Daniel Politzer. “We also believe this news potentially puts CZR in play and could be an invitation for other operators to take a look at/potentially bid for CZR.” Wouldn’t that make for an interesting auction? It would certainly put another boost under the Caesars stock price.

Other incentives for Caesars would have been been renewed access to the Lake Charles, Louisiana, market which draws heavily from the wealthy Houston area (and from which former Caesars CEO Gary Loveman withdrew), a first-rate casino in downtown Las Vegas — the Golden Nugget — and access to Fertitta’s vast repertory of restaurant brands, which could be retrofitted into the Caesars portfolio. Imagine going to a Caesars property and being able to dine at Morton’s Steakhouse, Vic & Anthony’s, or Bubba Gump Shrimp, to name but three. A merged company might have had to downsize in Atlantic City, where Caesars owns three casinos and Fertitta has a Golden Nugget.

Landry’s owns some 600-odd restaurants, in addition to its five casinos, so this wouldn't have been a case of a guppy swallowing a whale. Politzer crunched the numbers and calculated $13 billion in revenue for the combined companies and $150 million in synergies (removing duplication of effort in marketing, databases, etc.). Some of the cost of the buyout would have been eased by selling some Caesars casinos to its real estate investment trust, Vici Properties, and leasing them back. Caesars might also have shed its grind-joint Bally’s Atlantic City casino outright (that’s not a dig; Caesars has explicitly positioned the property for low rollers) to lower its exposure on the Boardwalk, where it is already heavily affected by brand-new Hard Rock Atlantic City.

Although it was difficult to visualize a downside for Caesars, the company apparently didn't feel compelled to submit to Tilman’s embrace, indicating that it wasn't interested. According to JP Morgan gaming analyst Daniel Politzer, on November 1 Caesars management "officially confirmed it rejected an offer from Tilman Fertitta, but we think interest in CZR remains high, and we expect further industry consolidation."

Instead, outgoing CEO Mark Frissora has been on a shopping spree, buying two racinos in Indiana from Centaur Gaming and kicking the tires on an acquisition of Jack Entertainment, which would give it two casinos and a racino in Ohio, plus a casino-hotel in the heart of Detroit. The latter would be a reversal of another Loveman move: Buying into the Ohio market (paid for by vacating St. Louis), only to turn around and sell out to partner Dan Gilbert after a relatively short period. It wasn’t something for nothing, but it came close.

Back to Fertitta. Buying Caesars would have been a heavy lift, adding 55 casinos — some in international markets — to the relatively small Golden Nugget portfolio. It would also have meant considerably enlarging his $4.3 billion debt burden (although Landry’s has an enviably low debt-to-equity ratio, so the deal was sensible).

With some operators, this would be a prescription for disaster, but Fertitta has one of the sharpest learning curves in gaming — maybe the sharpest. And he would have had the existing Caesars brain trust upon which to draw.

A merger would have also brought together two massive databases, Landry’s and Total Rewards.

I believe a Landry’s/Caesars merger would have been a huge plus for the gaming customer, but so far, it looks like it's not to be.