Eldorado’s Caesars gamble; Chicago casino not welcomed

For those of you who are beginning to have misgivings about the Eldorado Resorts takeover of Caesars Entertainment, add The Motley Fool‘s Travis Hoium. The latter is almost never wrong, so we pay attention when he writes that “The final deal sounds strangely familiar to the disaster that ultimately befell Harrah’s” in 2007, perhaps worse since Caesars has sold most of its real estate, leaving with less of an asset base against which Eldorado can borrow. The latter will cash and carry $7.2 billion of the acquisition, cover some of the cost with stock (Eldorado’s is far more valuable than Caesars’), assume $6.3 billion in debt, and have Vici Properties sell assets and jack up rents by $98.5 million. Eldorado “may be in a more precarious position than you might think,” writes Hoium. “The debt load may not seem onerous if you look at the projected $3.6 billion in annual [cash flow, a 21% return on investment] after the deal is closed, which includes $500 million of assumed synergies, but we shouldn’t assume that EBITDA will remain where it is now forever.”

Pointing to history, Hoium continues, “When Harrah’s was bought out in 2007, it wasn’t any operational flaw that crushed the company — it was the recession in 2008 and 2009. EBITDA dropped at every casino company, and in some cases fell to zero.” A 30% drop-off in business would leave Caesars with less than $2.2 billion in cash flow and “a suddenly precarious financial situation.” As Hoium says, casinos don’t get in a pinch during prosperous economies when consumers are spending freely (and there does seem to be a trace of consumer pullback at the moment). “Eldorado is setting itself up to be highly leveraged both financially and operationally after buying Caesars,” a scenario that requires every thing to go right. Will history repeat itself? We hope not but Eldorado has set itself up for a nasty fall, should we encounter any economic déja vu.

* So long sought by Windy City politicians, a Chicago casino now seems as welcome as a case of mumps. Downtown sites (like the old post office) are out of the question, after tourism and convention boosters kicked up a ruckus—and never mind that a casino could be good for the convention business and as a tourist attraction. (Think MGM Grand Detroit.) Mayor Lori Lightfoot, who got elected on the premise that she was less corrupt than her opponent (or so my Chicago source puts it), has picked five potential sites and they’re all on the west and south sides of town. Lightfoot aims to use the casino as an anti-poverty weapon aimed at underprivileged neighborhoods. We’ll see how that plays.

* Resorts World Catskills is going private. No word yet on whether this will enable Genting Group to sweep embarrassing financial results under the carpet.