On Sunday, Eldorado Resorts (ERI) and Caesars Entertainment (CZR) announced that they had come to an agreement under which the regional casino company would acquire its larger peer. And while that may seem counterintuitive, Motley Fool contributor Dan Kline -- who has been known to sit down at a blackjack table on occasion -- has some insights on why this union may produce a casino operator that's more than the sum of its parts.
In this segment of the MarketFoolery podcast, he talks with host Chris Hill about what each company brings to the table, market saturation, loyalty programs, and the area that he sees as providing the post-merger company with serious long-term growth potential.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on June 24, 2019.
Chris Hill: We are going to start with the Deal of the Day because once again, Merger Monday has lived up to its title. This time in the casino industry. Eldorado is acquiring Caesars Entertainment. Maybe this shouldn't be curious. It's a little curious, just from the standpoint of, from a market cap standpoint, this is the smaller company acquiring the larger company; certainly the better-known company in Caesars. I think the people at Eldorado recognize that, because they've immediately come out and said that the resulting casino company will be branded Caesars.
Dan Kline: Eldorado, I knew them as a furniture chain. I'd never even heard of them as a casino company. Their casino properties are in offbeat places for the most part. It marries really well with Caesars. Caesars has been under fire for underperformance. There's been a lot of pressure to do something to change management. This is actually the perfect deal. It gives Caesars a presence in places like Florida. I live down the street, about an hour, from six or seven different off-brand secondary casinos and one Hard Rock. I usually go to the Hard Rock. But now, I'm going to go to the Isle Casino, which is an Eldorado property, because I am a Caesars loyalty member. I think that's the part of this that's being underplayed. It's going to give Caesars a presence in a lot of markets where people are going to say, "Gee, I'm in Louisiana. Which casino am I going to go to? Oh, I'll go to the one where I already have the card, where I'm already getting perks." So I think there's a huge synergy here.
The other piece of it is, this gives them sports gambling potential, bigger imprint, a lot more states, and they have the infrastructure. Even places that are going to let you do it electronically are probably still going to need a casino to provide the infrastructure. This positions Caesars really well.
Hill: I'm going to pump the brakes for a second. I'm curious, just in this regard. When you look at what's happening with these stocks today, shares of Eldorado down about 10%, and it's entirely possible, if not probable, that people think they are paying too much for this. The buyout price for Caesars is $12.75 a share. Right now, it's trading about 10-15% below that. Let's put it in gaming terms. If you're at a casino, are you betting that this deal goes through as it is currently constructed?
Kline: I do think the deal is going to go through. I think the problem with the casino market overall is oversaturation. We were talking this morning, Matt Frankel and I, often on our podcast, about the New England area. When I lived in New England three years ago, there was Foxwoods and Mohegan Sun about an hour away. There was Atlantic City about five, six hours away.
Hill: Atlantic City, not in New England.
Kline: That was it. Now there's an MGM in Springfield, which would have been 25 minutes from where I lived; the casino in Everett, Mass., which is a Boston suburb, opened today. Who's going to close? It doesn't seem to me that the casual buses of old people who went to Mohegan Sun to have lunch and play bingo, why wouldn't they go to Springfield or Everett? It does feel like there's going to be some shakeout in the industry. But if you look at where a lot of the Caesars and Eldorado properties are located, they're the only player in town. We were at the Horseshoe last night. It's the only downtown Baltimore casino. It's near the baseball stadium. It's very well positioned for what it is. Same thing with the one near me in Pompano Beach. It's off from the concentration in the Miami area of all the casinos. They all have a natural constituency. But I wouldn't buy this deal for what's going to happen two years from now -- I'd buy this deal for 10 years on the horizon when we've figured out sports gambling and hefty casino companies, you're going to see a ton of consolidation, and you're going to see closures. I think Caesars will be a winner because of that.
Hill: I'm glad you mentioned that. That's where I was going next. Assuming this deal goes through, we now have the largest owner and operator of U.S. casinos. This seems like one of those industries where being bigger is better. I was going to ask you, should I be buying this? Should I be buying shares of Eldorado on the drop here? But it seems like, on the flip side, they're going to have to spend a lot of money, not just because Caesars comes with a lot of debt, but also because they may want to do some level of rebranding. Or, I guess I should say, we expect they're going to do some level of rebranding. It's just a question of how much. They're going to be spending money.
Kline: Yeah. And they have to integrate the loyalty programs. They have to think about whether they're going to change some of the names. Does it make sense to have an Eldorado, or should it be a Harrah's? I don't think you can underestimate the value of the Caesars loyalty program, which was just totally revamped. It's one of the more generous ones in the industry. They can use that to market. They know where I live. They can now say, "Hey, there's a casino 45 minutes down the road. Would you like to go to the Japanese restaurant there? You've eaten there before, how about going? By the way, here's 50% off tickets for Comedian X that you like." There's a lot of ability to manipulate people. I know that if it's not like Consumer Electronics Show, I don't pay for a room in Vegas at the lesser Caesar hotels. I'm not some big ticket gambler. Their ability to say, "Hey, it's a Wednesday night. Do you want to go stay at this property?" that's pretty strong. And adding all these states to it makes their loyalty program a lot more appealing.
Hill: That's another one of those sneaky tech companies. In the same way that for years, Domino's was this sneaky tech company because they were doing such an amazing job with their mobile app.
Kline: The good thing is, Caesars actually has a nice product compared to Domino's. We've talked about this before. Domino's whole business was convenient pizza is better than good pizza.
Hill: Convenient passable pizza.
Kline: Right. In this case, Caesars actually has a nice casino. If you're in Vegas, Caesars has everything from the lower-rent casinos to the upscale. I know I am perfectly happy staying at Harrah's. But when we're there in October, Matt's wife is coming so we're going to stay at Harrah's for the point we're there, then he's going to go stay at one of the nice Caesars-branded properties once his wife comes. That'll cost him as opposed to the completely comped. But they really have the full circle of stuff.
You talked about the tech side. We don't know where we're going with gambling and apps. Can you place a sports bet from your phone two years from now? If that happens, it's going to be very logical to tie it into existing casino companies.
Hill: One more sign that Matt Frankel is a smart man.