ERI is buying CZR for cash/stock worth ~$12.50. We move our PT to the implied value. We see potential bull case where the mkt values CZR at Friday's multiples inclusive of >$500m of synergies, implying $15. However, we see a (less likely) bear case the deal falls apart and the stock trades to $9.
Base case / strategic rationale. As we outlined in our 4/15/19 report, Caesars Entertainment Corp: Accretion Scenarios on Reported Merger Talks, CZR's large shared services platform and sophisticated loyalty program positioned it well for M&A. On Monday, Eldorado Resorts (ERI, not covered) announced it had entered into a definitive agreement to acquire CZR. ERI has a strong track record of acquisitions, having bought and generated meaningful synergies on MTR Gaming, Circus Circus and Silver Legacy Reno, Isle of Capri, Grand Victoria Elgin, and Tropicana. Given we do not cover ERI, we do not have our own forecasts on ERI's operating business so we move Equal-weight CZR. Our new $12.50 price target (up from $11 prior) is based on the implied value of the deal, using today's closing stock price for ERI.
Potential Bull case. As we also outlined in the 4/15/19 CZR report, ERI has a strong track record of achieving synergies, outperforming both its original goals and the industry in terms of synergies as a % of EBITDA. Assuming ERI can generate $615m of synergies, and CZR/ERI could maintain their Friday close 2020 blended consensus EV/EBITDA multiple of 8.7x, would imply CZR is worth $15/share, our new bull case. ERI highlighted on its call today that it expects to generate >$500m of synergies, not inclusive of marketing reinvestment cuts. We get to our bull case synergy target by assuming ERI can eliminate costs worth 21% of CZR's legacy EBITDA, similar to prior ERI transaction goals, and assuming $100m of revenue synergies to ERI, benefitting from joining Caesars Rewards loyalty program (per mgmt guidance). This also assumes forced asset sales due to geographic restrictions, though this would be dilutive to value.
Potential bear case. With a $420m break-up fee, significant synergy targets, and peer comparable leverage, we would be surprised if the deal fell through. Our new bear case of $9 is where we see the stock trading if this scenario took place, and assumes CZR trades down to 7.4x (comparable to BYD) our 2020e EBITDA, plus the breakup fee.
Transaction Overview. ERI (not covered) has agreed to buy CZR in a cash and stock deal worth $12.51/share (based on today's close, $12.75 based on ERI's 30-day VWAP, and $13.01 based on Friday's close), split $8.40 in cash and the rest in shares based on 0.0899 shares of ERI stock for every CZR share. The transaction implies a purchase price of 8.6x our 2020e EBITDA for CZR, pre-synergies. Mgmt expects the deal to close in 1H20.