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Should You Bet on a Las Vegas Recovery With Caesars Stock?

Caesars Entertainment (NASDAQ: CZR) and Eldorado Resorts are world-famous casinos with magnificent hotels and locations around the world. The two gambling giants recently closed their merger in a $17.3 billion transaction. Together, they will become one of the largest casino operators in the United States.

Now that the merger is complete, what can investors expect from the combined entity?

A blockbuster deal

The deal to merge Caesars and Eldorado was announced in June 2019. Eldorado agreed to acquire Caesars for $12.75 per share in cash and stock, valuing Caesars at about $17.3 billion. Despite Eldorado serving as the acquirer, the combined company chose to keep Caesar's name.

The rationale behind the deal is simple: Eldorado wanted to gain greater scale and property diversification. Furthermore, Caesars has a powerful brand in the gambling industry, which Eldorado can leverage to improve its market position across its properties, while taking advantage of new opportunities such as online gambling. The combined company now has 60 owned casino-hotels across 16 states in the U.S. And, of course, what is a huge merger without cost synergies? Eldorado has projected roughly $500 million worth of cost synergies in the first year following the closing of the deal.

On paper, the merger has the potential to be a slam dunk for Eldorado, because it can gain increased efficiencies through greater scale and leverage new access to the Caesars brand. However, the realities of COVID-19 have turned the entire hospitality and gambling industry upside down. a picture of the las vegas strip hotels

Image Source: Getty Images.

A tough time to operate a casino

COVID-19 has been kryptonite for the hospitality industry as hotels around the world stand vacant, and many casinos had to close their doors entirely. This left companies like Caesars and Eldorado with some of the worst financial performances in their histories.

First-quarter revenue for Caesars and Eldorado decreased 13.6% and 25.6% year over year, respectively. Both companies noted that the first two months of the year went well, but things took a turn for the worst in March. To reduce overhead costs and cash burn, Caesars furloughed the majority of its employees, and Eldorado reduced pay for its employees and management team.

There is still a great deal of uncertainty regarding how quickly the hospitality and tourism industry will bounce back. The new Caesars, even with its increased scale and reach, still depends on tourists for most of its revenue, and the business model fails if tourists feel uncomfortable visiting casinos.

These issues aren't unique to Caesars. Las Vegas Sands reported that second quarter revenue was down 97%. Other competitors such as MGM Resorts are facing the most difficult operating environment in their history, and it is almost completely out of their control. Realistically, until there is a COVID-19 vaccine or the pandemic has widely been declared over, casinos won't see their businesses fully recover.

Should investors bet on a recovery?

Even in unprecedented times like today, the merger between Caesars and Eldorado could prove to be extremely successful in the long run if the company hits its growth and cost-cutting targets. The combined company should be more profitable and have a stronger financial footing than the two companies had independently. Assuming business comes back, Caesars will be in a position to generate substantial cash flow and improve its balance sheet.

Caesars will reports its second quarter results after the market close on Aug. 6, and management is likely to share its outlook for the rest of 2020 at that time. The bad news is already well-known, and investors who do believe in an eventual recovery for the gambling and hospitality industry should consider the opportunity presented by the newest top dog among U.S. casino operators. 

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Luis Sanchez CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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