The Las Vegas Strip has gone dark because of the coronavirus pandemic, but one day it will once again be a sparkling gambling mecca in the desert. The opportunity that today's market pullbacks bring us should be welcomed. Both Caesars Entertainment (CZR) and MGM Resorts International (MGM 3.63%) have stories suggesting that upside awaits for investors post-virus.
Let's take a look at which is the better choice.
The odds favor this casino merger
Caesars Entertainment really got an unlucky roll of the dice -- the coronavirus crisis came right when it was wrapping up its merger with Eldorado Resorts. As a result, business valuations have changed. It's possible the whole $17.3 billion deal will have to be repriced, and it's definite that the deal's closure has been rescheduled. Originally, the transaction was expected to close in mid-April, but now expectations are that it will be late May or early June.
Commenting on the pending deal in Gaming Today, an analyst for SunTrust Robinson Humphrey said, "Our discussions with [Eldorado Resorts] management suggest that despite coronavirus they are still committed to closing the transaction as they still believe in the long-term strategic rationale."
The reason that the merger made sense in the first place remains the same. The combination of companies would benefit from the Caesars Rewards loyalty program with its more than 55 million members, and Eldorado's expertise in running efficient operations.
The joint press release from June 24, 2019, outlined the deal as follows:
Eldorado will acquire all outstanding shares of Caesars for a total value of $12.75 per share, consisting of $8.40 per share in cash consideration and 0.0899 shares of Eldorado common stock for each Caesars share of common stock based on Eldorado's 30-calendar-day volume weighted average price per share as of May 23, 2019, reflecting total consideration of approximately $17.3 billion, comprised of $7.2 billion in cash, approximately 77 million Eldorado common shares, and the assumption of Caesars outstanding net debt.
The spread between the purchase price and Caesars' closing price of $8.06 on April 23 is significant. This fact and changed circumstances raise the issue of repricing the deal, though neither company has yet indicated that will happen.
The deal still has to pass the scrutiny of regulators before it can proceed. They will be looking for any unsavory past relationships or lack of compliance, questionable legal records, and financial resources to pay bills and successfully support the merger.
If everything comes together and the merger takes place, the resulting company would be a formidable presence in the gambling industry, with a total of 76 properties.
New leadership and solid financials point to a sunny future
MGM Resorts International isn't in flux as much as Caesars, but when CEO Jim Murren stepped down in February after 12 years at the helm, the company had to be ready for changes. In March, MGM named COO Bill Hornbuckle as acting CEO and president, just as the COVID-19 health crisis shut down the company's properties.
Hornbuckle has the experience to run the company well, and MGM likely has the liquidity to come out of the shutdown in good shape. It reassured investors in a March 27 press release that it has $3.9 billion in cash and cash investments to support liquidity through the current uncertainty.
Under Murren, MGM moved toward becoming more asset-light by executing on several sale/leaseback real estate deals. In January, MGM Grand Las Vegas and Mandalay Bay were sold in a leaseback deal of almost $4.6 billion to a joint venture of MGM Growth Properties, a property holding company, and Blackstone Real Estate Income Trust.
But if the shutdowns are extended or other unforeseen events occur, the company still has several salable properties, including MGM's 50% stake in the CityCenter Las Vegas development.
MGM Resorts International will likely get through the coronavirus without a financial crisis, but the stock price has taken a beating. Shares were above $30 in February, but within weeks dropped as low as $5.90 in mid-March.
Which stock is the better buy?
The Caesars/Eldorado merger is likely to produce a gambling giant, but at this point there is too much uncertainty surrounding the deal to recommend buying Caesars stock.
MGM shares have recovered a bit from their lows and closed at $13.77 on April 23.The current price-to-earnings ratio stands at 3.6, which compares quite favorably with the industry average around 22.
At this point, I think MGM Resorts International is the better buy due to brand recognition, experienced leadership, financial resources to ride out the coronavirus storm, and a very attractive share price. Given the uncertainty facing the gambling industry, this stock is not for the faint of heart. But for a long-term investor with a tolerance for risk, MGM is an attractive pick.