Caesars Can Meet Its Activist High-Roller Halfway

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Includes: CZR, ERI, LVS, MGM
by: Lipper Alpha Insight
Summary

Caesars Entertainment is in a high-stakes game with Carl Icahn.

The activist has taken a nearly 10 percent stake in the casino operator and wants it to consider a sale.

A good first step would be to work with Icahn to select new leadership.

By Breakingviews

Caesars Entertainment (NASDAQ:CZR) is in a high-stakes game with Carl Icahn. The activist has taken a nearly 10 percent stake in the casino operator and wants it to consider a sale. Even at Caesars' apparent low valuation there's no easy buyer, and its mediocre performance means it has no reason to sell in haste. A good first step would be to work with Icahn to select new leadership and leave more drastic action until later.

The owner of the casino once beloved of Frank Sinatra has had a rough few years. A private equity takeover by TPG and Apollo Global Management left it larded with debt, forcing its main operating division into bankruptcy. It emerged in 2017 after a messy fight with creditors. Then in November last year, Chief Executive Mark Frissora said he was stepping down.

With the company's leadership and structure in flux, performance has failed to impress. Excluding results from an Indiana casino and race-track company it bought last year, revenue was roughly flat in 2018 and up only slightly in the fourth quarter last year, the company said Thursday. There are hopeful signs. Revenue per available room is rising, as is occupancy in Las Vegas. But the company noted its Atlantic City casinos are suffering because of competition.

In the past year Caesars' stock has fallen some 28 percent, including a recent run-up after the market got wind of Icahn's involvement. That's a much bigger hit than competitors MGM Resorts International (NYSE:MGM) and Las Vegas Sands (NYSE:LVS).

Rush into finding a new owner and Caesars risks leaving money on the table. Plus there's no easy buyer. MGM is a match, but its overlapping businesses in Las Vegas could create an antitrust issue. Houston billionaire Tilman Fertitta, owner of Golden Nugget Casinos, is interested, Reuters says. But his company is unlisted so a deal would need to be in cash, which is no mean feat given Caesars' $6.3 billion market value or structured as a complex reverse takeover. Regional gaming operator Eldorado Resorts (NASDAQ:ERI) is in a stronger position - its stock is up more than 45 percent in a year. But its market capitalization is a bit more than half that of Caesars.

Icahn could be a good helping hand in other ways. He has experience in Atlantic City. Plus appeasing him with a board seat, a say in the company's strategy and a role in choosing the new chief executive could buy Caesars some time to see how the chips fall.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.