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50% Potential Upside On MNTG Shares

|Includes:CZR, Eldorado Resorts, Inc. (ERI), LVS, MGM

MTR Gaming (MNTG) and Eldorado Resorts are merging into a new entity called ERI.

The merger was originally scheduled to go through by mid June but there are a lot of state gaming commissions who have to approve it (Nevada, Pennsylvania, West Virginia, Louisiana, Ohio) and it has been delayed. Yesterday the two entities agreed to extend the merger agreement for up to 6 months. ERI, following the mergers, will own casino's and the attached hotels, restaurants, conference facilities, etc. in Reno, Nevada, Shreveport, Louisiana, Erie, Pennsylvania, Columbus, Ohio and Chester, West Virginia; racetracks in Columbus, Ohio, Erie, Pennsylvania and Chester, West Virginia; as well as

The transaction is pricing MNTG at $6.05. If the merger goes through, MNTG shareholders can elect to receive either cash or shares in the new entity subject to a limit that no more than 20% of all shares can be exchanged for cash. If shareholders electing cash exceeds 20%, then the cash will be pro-rationed among those shareholders electing cash. The remaining MNTG shares will be exchanged on a 1 to 1 basis with shares in the newly merged entity, ERI. The existing Eldorado shareholders will also get ERI shares based on a formula of 6.81 x the previous twelve months EBITDA of Eldorado (equivalent to $6.05 at the time the merger was agreed upon).

So the implied gain for MNTG if redeemed for cash is 25% (based on today's MNTG share price of $4.85). However, taking shares of the new ERI may be the better option. For comparisons sake, MGM, CZR, and LVS trade at a EV/EBITDA multiple of 11-14. Taking the average of these, 12.5, and discounting it 20% due to ERIs smaller size and likely lower liquidity, we get an expected EV/EBITDA of 10. This implies a potential price of $7.43, a gain of over 50% for current shareholders of MNTG.

Disclosure: I am long MNTG.

Additional disclosure: As I am not aware of your personal financial situation, this is not a recommendation for purchase or sale of any security. Please do your own due diligence. MNTG is thinly traded, if you do decide to buy shares you may wish to consider using a limit order.

Stocks: ERI, CZR, MGM, LVS