Hedge funds and activist investors continue to circle Caesars Entertainment (CZR), a regular target for large investors over the past 15 years. This time around, Las Vegas regular Carl Icahn has taken a more than 10% stake in the company, hoping to work out a deal to sell to another investor. 

Between Icahn, Canyon Capital Advisors, Apollo Global Management, and Pacific Investment Management, nearly one-third of the company's shares are held in a few managers' hands. They could push to make a deal, but even if they do, the gains may be short-lived and put Caesars in a more precarious position long term. 

Las Vegas sign at sunset.

Image source: Getty Images.

What Icahn sees in Caesars Entertainment

Let's be clear: Icahn is trying to push for a quick sale of Caesars to another buyer -- he isn't trying to buy the company himself.

The buyer who seems to be the most interested in buying Caesars is Tilman Fertitta, owner of the Golden Nugget in Las Vegas. Fertitta's empire started in restaurants and now includes the Rainforest Cafe, McCormick & Schmick's, and Joe's Crab Shack under the Landry's umbrella. 

As big as Landry's is as a restaurant chain and casino operator, it would be a big deal to swallow Caesars Entertainment's $7.5 billion in net debt and $6.1 billion market cap. Either Fertitta will have to add tremendous debt to buy out the company (which seems unlikely) or it would be a complex merger bringing Caesars and the Golden Nugget together.

Outside of giving Fertitta a large stake in Caesars in something like a reverse merger with the Golden Nugget, it's not clear what the company would gain by adding more properties off the Las Vegas Strip. And it's not at all clear that Fertitta would be able to pay cash in any deal for Caesars, especially given the company's debt load and recent history in bankruptcy court.  

CZR Market Cap Chart

CZR Market Cap data by YCharts.

The other suitor, according to The Wall Street Journal, is Eldorado Resorts (ERI), a high-flying casino company that's expanded since the financial crisis by acquiring competitors at a rapid clip. Buying Caesars, which is bigger than Eldorado, would continue the high-risk, high-reward strategy. But given how little in EBITDA (a proxy for cash flow from resorts) that Eldorado brings to the table and its high debt load, it seems like Caesars would be saddled with even more leverage from a merger. Is more debt really what Caesars wants in a stock-for-stock merger deal? 

ERI Market Cap Chart

ERI Market Cap data by YCharts

In both cases, a sale to smaller casino companies could leave Caesars in a weaker position shortly after it emerged from a decade that included many rounds of debt refinancing and a bankruptcy of its own. It's not hard to see why Caesars Entertainment's board of directors has brushed off acquisition offers thus far, no matter how much pressure activists bring. 

Check out the latest Caesarsearnings call transcript.

How Caesars can get its mojo back

As much as Caesars may be better of on its own, the company has a lot to prove to investors. Its stock has struggled for the past year in large part because the company's operations have stalled. Organic revenue was flat in 2018, which investors don't like when paying for a highly leveraged stock. 

To turn around, Caesars needs to show that it can grow organically. Overall growth in the U.S. gaming market would help, but the more immediate impact may come from nongaming resorts in Dubai, Mexico, and Arizona. These resorts require very little capital from Caesars and provide revenue and cash flow. Problem is, it could take years for those resorts to start affecting operations, and the delay could keep the stock from getting its mojo back.