On its own, Caesars Entertainment (NASDAQ:CZR) was finally starting to reach a sustainable point. The company got through the bankruptcy of its biggest operating unit, launched a REIT, and is starting to grow EBITDA again. But its stock price wasn't responding, so Carl Icahn started pushing the company to sell itself. Today, it appears his efforts have paid off. 

Eldorado Resorts (NASDAQ:ERI) has offered a total package of $17.3 billion, including assumption of debt, to Caesars Entertainment to acquire the company. Current reports have the deal being for $7.2 billion in cash and 77 million shares of Eldorado shares in exchange for Caesars' equity. The deal will have the much smaller Eldorado continue its buyout streak and greatly increase not only its scale, but also its long-term risk. 

Panoramic of the Las Vegas Strip.

Image source: Getty Images.

Winning the long shots

A few years ago, Eldorado was a small gaming company, but it saw an opportunity to go on a big buying spree. It acquired MTR Gaming, Isle of Capri Casinos, and Tropicana Entertainment to expand its empire to 26 casinos in 12 states. 

You can see below that even after the buying spree, Caesars Entertainment is a much larger company. So, naturally Eldorado will have to take on additional debt to complete the buyout, on top of Caesars' debt, increasing its own leverage. 

CZR Enterprise Value Chart

CZR Enterprise Value data by YCharts

The good news is that Eldorado is getting Caesars for relatively cheap, at least by today's gaming standards. Caesars generated $2.3 billion of EBITDAR, a proxy for cash flow from resorts, in 2018; an $18 billion buyout would be a multiple of under 8 times. The multiple is low partly because Caesars doesn't own its real estate, increasing its operating leverage. 

Another piece of the deal is VICI Properties acquiring $3.2 billion of real estate, which is expected to reduce Eldorado's overall debt load. 

The big bet for Eldorado

If this buyout seems eerily familiar, it's because Caesars Entertainment was once known as Harrah's Entertainment, which was bought out for $28 billion (including debt) by private equity buyers in 2007. Before long, the company was in financial ruin and has been scrambling to generate any value for its owners ever since. 

The biggest problem Harrah's, and ultimately Caesars, had was debt. The company was highly leveraged when the recession hit in 2008, and when spending on vacations and gaming dropped, the company couldn't adapt. Eldorado has now set itself up to be the Harrah's of 2007. If the economy continues growing, the deal will be a great leveraged bet on gaming growth, but if a recession hits, the company won't be well positioned to survive

Lots of questions ahead

Shares of Eldorado Resorts dropped double digits when the Caesars acquisition was announced, so investors clearly aren't seeing the move as positive from that company's side. The big reason is risk. The company was already highly leveraged after its recent buying spree, and this just increases that leverage. If the gaming industry or economy teeters at all in the next few years, the acquisition could be another disastrous move, which investors are pricing in today.