“Companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time” Jamie Dimon CEO JPMorgan Chase
Caesars Entertainment Corp’s (CZR) move last week to acquire William Hill PLC (WMH) is a classic play right out of the Jamie Dimon playbook as noted in the above quote. You can impose any number of standard metrics to the proposed deal that translate to a stock that is forecasted by analysts to run a wild best case worse case gauntlet between $54 and $75 a share going forward. In brief, the questions fairly asked here if you go by familiar data points this this: Is CZR grabbing for seconds before it digests its first main dish? Does a case of indigestion await management? Taking on $17.3b in debt to buy CZR is one thing. Then in fast order, reach for a UK sports betting giant in a deal now valued at $3.7b is quite another.foxbusiness.com markets>williamhill>backs>caesars
Or is it? We’t think this big appetite reach by CZR is all about strategy, not financial engineering.
It is an example of a clear headed vision that will be transformative. It’s a perfectly logical move made with speed and daring at a time when many observers felt, that El Dorado (ERI) would be too busy digesting and deleveraging CZR to do anything dramatic on its sport betting business but possibly spin it off. This is not a numbers cruncher’s exercise. There are financial aspects of this deal that can be head scratchers. This is all about recognizing and acting swiftly when you know you have a hot hand. CZR has a hot hand. It also has Icahn on the team as well as a solid ,feet on the ground management.
Literally a few short years ago, , El Dorado was a Reno based operator of a handful of family founded casino properties with a very solid, operating record and sharp customer centric focus.
Today as the result a skillful observation on how the casino industry was consolidating, CEO Tom Reeg and the Carrano family management, went for the gold. Linking arms as it were with another very smart appraiser of industry trends and corporate management failures in Carl Icahn, they pulled off a David eats Goliath deal in the $17.3b acquisition of Caesars.fortune,com 2019/06.24>eldorado>caears>carlicahn
The result is the creation of the largest casino company in the US, with up to 60 properties in 13 states. Estimated revenues, assuming a post-pandemic world, could reach $8.76b, a sales growth of 114%. Analysts are still looking for a negative earnings result of –$1.12.
This is of course related to the uncertainties over the pandemic duration and speed of deleveraging. How quickly are US regional casinos recovering? When will Las Vegas start to see numbers that encourage rather than raise questions? Will the announced $500m to $600m in synergies promised by the merger partners materialize? Above all what is the time line for a CZR to realize its clearly immense potential.(Below: A conservative take on sports betting revenue forward growth.) Source: Vixio Gambling Compliance: Bloomberg)
If this move on Hill closes, our answer to the last question is: CZR will be well on the road to attaining a range of $80 to $100 a share by 3Q21. The entire value lies in the 180 -degree integration of the company’s 60m data base: Las Vegas flagship(s) strip properties customers fed by the regional system, convention business, high end international baccarat business and now sports betting. That may appear to be overly bullish to some skeptics. They have not been believers in the stock because of the inflection of an extended pandemic further burdened by the massive debt incurred by the merger.
We accept that but continue to believe, as we have long noted on SA, that the risk reward on this company will outrun the skeptics over time.
I have been following the company since my days there in the ‘80s as a c-suite executive. Since then I have been in regular contact both with other CZR alumni, staffers and planners. From 1998 then Harrah’s CEO Phil Satre chose Harvard professor Gary Loveman as new company CEO. I spoke to Phil as an industry friend and asked about his outside of the box choice. He told me of Loveman’s pioneering consulting work in developing what became Harrah’s and then Caesars Total Rewards database and mining it better than anyone else. (Below: Caesars Palace the mecca brand over 50 years, Source: Caesars archives)
I had my doubts because I did not see the company as a spoke and wheel system alone. I saw the most famous single name in casinos globally beginning to lose the singular cache that needed more nurturing. Marketing tech employed by Loveman was pretty much invented by Steve Wynn during the 1980’s, albeit on a much more rudimentary scale based on then available data mining technology. In 2002, when Macau opened up I was literally flabbergasted that CZR had not been among the earliest petitioners for a concession deal. It was all the more astonishing to me that during my tenure at the company I had run a chunk of international marketing and come to know the late Macau gaming king, Stanley Ho.
CZR had the strongest brand name in Asia for decades. Our high end baccarat wins were the envy of the industry. I was further stunned when after it became apparent that Macau would overtake Las Vegas as the global ground zero of gaming revenue, that CZR continued to take a pass on Asia. (Too little, too late, it bought into a 50% development deal in South Korea for $775m. My best guess now is that CZR will be looking to unload it as soon as the right offer materializes).
Loveman confronted the 2007/8 financial crisis in the teeth of an awful $18b deal he made to sell the company to private equity operator Apollo Global (APO) and Texas Pacific Group(TPL). He buried CZR in debt, added fat to the corporate hierarchy that ruled many functions that should have been left at the property level. Events and policy led the company into ultimate bankruptcy 2015 and Loveman’s departure. He was replaced by a former Hertz CEO until 2019 when Carl Icahn entered the fray and sent in gaming veteran Anthony Rodio.
Until Rodio, the company had thus been run for nearly 20 years by non-gaming belt and suspenders corporate types and its vulnerability to a takeover was a direct consequence of that mismanaged strategy. Rodio quickly began to right the ship.
Icahn saw the hidden value of the stock and acted. He bought in, replaced Frissora and then found a deal partner in El Dorado’s Reeg. In Reeg you had the first full blooded gaming executive leading the company in decades and that is part of the root system of where the Hill bid originated.
The Hill deal envisions a total command of a customer’s gaming wallet approach to the sector that will emerge post-pandemic. (Below: CZR already has sports media partnerships across the board. Source: CZR archives)
With Icahn’s entry I began guiding overweight and strongly bullish on my alma mater’s stock, first time in years.
On January 22 of this year for example, in SA I examined the implications of the Icahn and El Dorado moves on CZR.
On that day CZR was trading at $13.62 and ERI at ~$43, Back in 2017 I urged a buy when CZR was $14.
At writing today: ~$52.35
It’s 52 week range from $5.99 (pandemic breaks out) to $70 pre-pandemic. This is not taking bows for what I knew was obvious to many, namely that the asset base, brand power and potential of the company far exceeded the value of its stock. My stance on the stock came as much from my alumni knowledge of the underlying dynamic of the company and its brands, then reading the entrails of earnings reports.
In brief what I saw, as did I assume, many others, was a company undervalued largely due to mismanagement of a great asset over a long period of time. The strategy it seemed to me, flew in the face of what common sense, up from the casino floor management taught us all: Centralization of too many management functions into a corporate bureaucracy was poisonous to progress. On the other hand, de-centralization by giving property level managers as much freedom as possible inside the system, is a certain formula for success. The product of decentralization is more face to face contact at every customer facing job on property.
The realization: Both in Vegas, but in particular, the US regional casinos business that the fight for share of wallet is a market by market warfare, not a one size fits all set of papal bulls as it were, from a council of corporate types.
The move on sports betting is an extension of a core strategy to command more of the total gaming wallet of every customer on the database as well as new ones attracted to the amazon-like customer centric approach: Everything you want in gaming, we have. Every transaction be it the casino floor, the sports books, or on mobile is easier to process. Because you can get an a to z set of gaming products from a single source, your patronage is more highly prized. Your service will be as attentive and warm as we can make it.
And the true test of fame as we’ve often noted is this: How do you know when someone or something is truly famous? Answer: When after you repeat the name, you do not need to say what it is or what it does. So anywhere in the world, say the name Caesars and you do not have to explain that it’s a gambling business. No other operator enjoys that deeply etched stamp in the leisure sector. And if they are in the process of buying it, they’re going to burn a lot of coin in the process, coin CZR does not have to toss into the fire.legalsportsreport,com >sports betting ads
The sports betting fit: Here’s comes the 600lb gorilla
We have tried to bring some perspective to the explosive growth of sports betting stocks all year as they skyrocketed far beyond the most bullish outlooks of some analysts. We liked the sector and many of the stocks in it for various reasons.
For example, we liked and still like Draft Kings Inc. (DKNG) as a fine pure play. But we questioned its runaway pace on the upside before the cut and thrust of market share battle had proven who were the winners and who were the also rans.
We thought the big players in the space were overspending customer acquisition by a long margin. That unless and until those costs came into a better perspective, investors were playing with a bit of dotcom delusional fire. We kept our buy guidance on the stocks because we thought that the roll out of more states to legalize sports betting was a clear catalyst that could not be denied.
The same approach applied to casino stocks with major commitments into sports betting. Among them Penn National Gaming Inc. (PENN) which bough Barstool and its potent 60m plus “stoolie” base. The stock has been caught up in a wild ride and for those who got on early, great for you. Penn’s 52 week range looks either like a space shot destined to land safely on another planet or a possible roller coaster ride poised at the top, looking down the steep dive down.
It reached a pandemic low of $3.75 and shot up to a high of $76. So follow this logic: A very good company with a great geographic spread and 41 properties is punished by the pandemic to sell for peanuts and suddenly after the Barstool deal it become the all time unicorn romping in the fields to applause by Mr. Market.
Penn has fallen back a bit to $68 as of this writing. It has room to fall further or go higher depending on if the NFL season proceeds as contagion free as has both the NHL and NBA. In brief, if the season proceeds healthily, there would be a clear upside on all sports betting stocks. That means we’ll have a big Super Bowl bump. If contagion second wave attacks the league and shuts it down, the ride down will be fast a furious tanking to much more realistic valuations which take into consideration the brick and mortar casino sector action.
Meanwhile, as the Barstool mania ensued, what was happening to Penn’s core business? It was, like the entire sub sector, taking a historic hit. Its great asset base, its good management ethos was the same when the stock was $3.75 as it was at $76. Something doesn’t compute. Its properties are nowhere near an inflection point indicating any more of a rapid recovery ramp than any of its equally good competitors. Penn will clearly recover. The Barstool deal has potential but it will take time to see just how much of its database can contribute to accretive earnings in a company still predominately dependent on brick and mortar casino business going head to head in key markets with the likes of CZR as well as Boyd Gaming (BYD) and many others. Plus it has no major Vegas flagship to feed.
(Below: CZR is linked by deals with Fan Duel.The Stars Group divisions of Flutter Entertainment (FLTR) and a deal with FoxBet. Source: Civic Science. It also has a deal with Hill to run its live books at CZR properties wherever sports betting is legal. This is a full court press on market leadership).
Why is a CZR armed with William Hill going into market share sports betting battle now the best deal in sports betting stocks?
As we noted at the outset. This deal is about strategy in the formation of a dominant wallet CZR customer. It’s a patron who will be part of the “family” whether on a trip to Las Vegas, Reno or a customer in one of its 60 properties in 13 states and now, with a data base of 60 million and the Hill brand already stamped for decades in the mind of sports bettors.
CZR does not have to spend anywhere near what its competitors do on customer acquisition and massive media.
What CZR is saying to Mr. Market is this: We will wrap our arms around customers no matter what his or her passion:
1)Live casino gaming, online casinos slot, blackjack, etc. operating under the famed CZR imprimatur which needs no introduction to the nation’s gamblers and tourists. 2) Sports betting through a William Hill branded live sports books as well as mobile applications in states where sports betting is legal and operative and CZR has a presence: Mississippi, Nevada (Hill runs over 100 sport books in state casinos now) New Jersey, Indiana, Pennsylvania. 3) Flagship Las Vegas strip casinos like the mecca, Caesars Palace to which it can feed a steady flow of rewards customers to fill rooms ,play slots, bet on games, shop, dine, see shows.
That translates to the best possible shot at sports gambling wallet dominance for CZR.
CZR already owns 20% of the Hill US business. It will finance its purchase of the parent issuing an estimated 30m shares at an estimated $75 a share, a hefty premium over its current trade by issuing common stock. There is then the prospect that it could decide to spin off Hill’s UK and global businesses to Apollo, or another major international online betting operation.
Hill runs 1500 betting shops in the UK which have been damaged by government regulations to limit max wagers from kisoks. So that business is challenged for certain. But street UK betting shops will survive as they are part of the cultural gaming fabric of the country. The shops plus the big global mobile betting business can be valued for a potential buyer. The proceeds of such a deal could materially lower the net cost of the deal to CZR. Add to that what CZR believes could be $900m in synergies, to the proposed $500m in the El Dorado merger. If management can deliver that kind of savings amounting to $1.4b, they will have made one of the great deals of the gaming industry in the last twenty years.
The competitive edge CZR will have lies within the total package of its product and service lines to the gambler/sports bettor. Integrated under the brand is every gambling product a customer may wish to buy, Going head to head now with the other giants in the space, CZR can operate eventually on a lower cost base due to a much lower than average customer acquisition cost and a much more diverse set of reward goodies it can offer gamblers.
So like all stock in the sector, it’s watch and wait time until a vaccine arrives, and mass inoculation is well underway reducing customer anxieties about casino visitation. But when deliverance comes, we think CZR will join the heated battle for top brand market share with Draft Kings, Fran Duel (Flutter (FLTR), Penn National, BetMGM (MGM), BetAmerica (Churchill Downs (CHDN) 888 and many others.
We see CZR emerging post-pandemic as being among the top three leaders. That translates to us to an $80 to $100 stock when a close semblance of normalcy returns to the sector.
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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.