Eldorado Resorts CEO Tom Reeg has called the acquisition of Caesars Entertainment a “home run for all of our stakeholders.” However, that home run may turn into a strikeout if the market doesn’t recover quickly. Financial institutions that have pledged to put up more than $7 billion in loans could find selling the idea to investors difficult, thanks to the coronavirus and what it has done to the global financial markets.
Bloomberg points out that Credit Suisse Group AG, JPMorgan Chase & Co. and Macquarie Group Ltd. have been onboard the acquisition, agreeing in June of last year to provide the necessary financing. As the deal appears to be close to being finalized, with only a couple more regulatory approvals needed, the banks only have a little time left to convince bond and loan buyers that the “highly leveraged” deal makes sense.
Because of the coronavirus, stock trading was temporarily halted this week in order to prevent a further slide into a full-blown recession. Still, trouble remains and the gaming industry, as a whole, is feeling the effects of the coronavirus. Federal relief, in the form of stimulus incentives, may be coming, but it could be too little too late for a rebound in time for the proposed acquisition.
Gene Neavin, a senior investment analyst and portfolio manager at Federated Hermes, explains, “The best comparison might be 9/11, when people were scared to fly. Now people may be scared not only to travel but also to be in a casino with thousands of people.”
Bloomberg tried to get input from the banks and the two casinos, but they all, with the exception of Macquarie, refused to comment. Macquarie reportedly didn’t respond to requests for input.
The proposed funding would come via $2.4 billion in loans to Caesars and $4.8 billion worth of bonds and loans to Eldorado. This is a massive amount of leveraged finance by any estimation, and Eldorado is also counting on being able to reduce overhead by around $500 million to facilitate the process. Should the acquisition go forward, the newly-formed company would have “debt relative to a key measure of earnings to over seven times, according to credit-rating firms, possibly leading to a downgrade,” which might scare off certain investors even more.
Shares in Eldorado have dropped more than 50% in just two weeks as the entire hospitality industry has been sent spiraling downward because of the coronavirus. Fortunately, things haven’t yet reached a point where the deal would definitively be withdrawn, but it is certainly teetering toward instability. Reeg still remains optimistic, though, and told shareholders at the end of last month, “We feel very good about the execution that we’ll get in the credit markets. This deal is closing. It’s closing soon.” Hopefully, for the sake of all the hard work that has gone into the acquisition, the banks feel the same way.
