Eldorado Resorts (NASDAQ: ERI) has been on an incredible run for a half-decade after making a number of aggressive acquisitions. The latest move was its biggest, agreeing to buy Caesars Entertainment (NASDAQ: CZR) in a $17.3 billion deal.
What Eldorado wasn't expecting was a global pandemic to shut down operations of its casinos across the country. And that might be the one reason Eldorado isn't a buy for long-term investors.
Eldorado's biggest acquisition
First, let's look at what the Caesars acquisition looks like. There's $7.2 billion in cash going to Caesars investors, and $3.2 billion will come from VICI Properties (NYSE: VICI), $400 million from asset sales, and $3.6 billion in added debt and cash on Eldorado's balance sheet. In addition, Eldorado will have a new, upsized $1.0 billion revolver. In total, there was expected to be $15.5 billion in debt.
I'll note that this is before asset sales came in much lighter than Eldorado had hoped. It sold Eldorado Resort Casino Shreveport in Louisiana and the MontBleu Resort Casino in Lake Tahoe to Twin River Worldwide Holdings (NYSE: TRWH) for $155 million. But that was lower than the $230 million it agreed to sell just the Shreveport resort for a few months earlier. So, cash flow may not be what it was once expected to be if more assets have to be sold to get the deal done.
Prior to the pandemic, management expected the combined companies to generate about $3.6 billion of property earnings before interest, taxes, depreciation, and amortization (EBITDA), including $500 million in expected savings from synergies. So, given the $15.5 billion in expected debt, the company's debt alone is 4.3 times projected EBITDA. And that was before the gambling business was turned on its head.
2020 is going to be a disaster
We don't know exactly how operations have shaken out in the last month since casinos started opening across the country, but it's safe to say it won't be good. Travel has ground to a screeching halt, and the lucrative convention business that really drives the Las Vegas Strip during the week may not come back for years.
What will be left is a greatly reduced resort and casino business. It's hard to see how Eldorado will report anywhere near $3.6 billion in property EBITDA in the next few years, yet it'll be holding all of the debt it expected to when the acquisition of Caesars was announced. That leverage could backfire.
Why I'm staying away from Eldorado stock
Eldorado may have been a great growth stock before it announced the Caesars acquisition, but it's hard to see how that growth continues. The company has racked up a debt load that it may not be able to get out from under, especially if the economy doesn't enter some kind of "V-shaped" recovery. And that seems less likely by the day.
Worse yet, it has sold off most of its real estate to acquire competitors, meaning it has fewer real assets to fall back on and even more operating leverage than your typical casino company has traditionally had. That could hasten its fall from grace.
The market hasn't given up on Eldorado or Caesars yet, but I think investors should. This looks like a company that got in over its head during its acquisition spree.
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