Eldorado Resorts: Panic, Too Much Leverage, But It May Work Out

Summary

• Coronavirus is making investors fearful of getting involved with this hotel and casino entertainment company.
• Eldorado Resorts is making a huge acquisition that could be very rewarding for shareholders.
• This is a very speculative opportunity with a lot of moving parts. But there is a reasonable possibility it may work out.
• Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Get started today »

Investment Thesis

Eldorado Resorts (NASDAQ:ERI) is looking to acquire a huge company, Caesars (CZR), which will make Eldorado one of the biggest gaming players in the US.

With Coronavirus picking up pace, investors are concerned about its impact on this over-leveraged company, and how badly its revenues are likely to fair if the number of customers falls dramatically.

Also, more bad news is likely to percolate in the coming weeks, but for now, investors are steadfastly selling first and asking questions later.

With so much uncertainty in the air, investors are not to wishing to be left holding this investment in the event of a recession.

However, if Eldorado does succeed in vaguely reaching its target of $10 per share of free cash flow, today's valuation of less than $40 per share could make for a very attractive investment.

(Source)

The Big Acquisition

I'm never a fan of highly acquisitive companies.

The problem with these sorts of companies is that they never know when to stop. They pile on debt, buy a company, attempt to squeeze some synergies, which don't always transpire to be available and don't stop until it's often too late.

Furthermore, the size of the acquisition can only go in one direction, up. Indeed, the acquisition of Caesars by Eldorado is close to ludicrous.

Eldorado's market cap is close to $3 billion, and it's buying up Caesars with an enterprise value of close to $17 billion: very roughly $8.5 billion of cash and stock, plus the assumption of Caesars debt of around $9 billion.

Having said that, Eldorado states that the after-tax consideration is only $14.1 billion:

Source: Slide 4

What will be left for Eldorado to acquire next? Will it move its ambitions Internationally?

The Carrot for Shareholders

Source: Slide 5

Assuming that the acquisition goes through, Eldorado will be left with a leverage ratio of about 7.2x. Post-completion, Eldorado will attempt to move fast and sell off some non-core assets and use their cash flows to pay down debt, with the goal of bringing down their debt by roughly $4.5 billion.

However, this will still leave Eldorado with roughly $7.5 billion of debt, with CEO Tom Reeg declaring that the goal will be to bring down its debt to about 3x over time. This seems like a huge feat to accomplish, particularly if the economy slows down.

Valuation - Very Wide Range of Outcomes:

If everything goes right, then investors should minimally expect to double their capital, and investors could see 75%-100% upside to roughly $70-$80 per share, or 7x to 8x free cash flow per share.

The problem though, with too much debt, as well as a possible economic slowdown, there is simply no room to maneuver.

Could Eldorado's shares sell off further, to say $1 billion market cap? Absolutely, it could. That's the problem when the company's growth is substantially driven through M&A, investors need more good news to drive the share price higher.

The Bottom Line

This is a very speculative opportunity with a lot of moving parts. But there is a small possibility it may work out. Investors should watch this space.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.