CZR/ERI: Potential Combination Could Raise Competitive Concerns, Divestitures in 4 Metropolitan Markets
Wed 03/20/2019 11:42 AM
Takeaways
A potential combination between Eldorado Resorts Inc. and Caesars Entertainment could potentially raise antitrust concerns in four metropolitan regions and result in divestitures of gaming properties.
Earlier this week, media reports indicated that Caesars was exploring a merger with Eldorado, with activist investor Carl Icahn - who controls three seats on Caesars’ board - actively pushing for the company to pursue a sale.
Antitrust Analysis
The FTC has significant experience in analyzing mergers in the casino space. The FTC’s conditional approval on the Pinnacle/Penn National merger last year and the agency’s decision in the Ameristar/Pinnacle merger in 2013 will likely inform the regulatory review process with respect to a potential Caesars-Eldorado combination.
In both cases, the FTC defined specific metropolitan areas as relevant geographic markets. Moreover, the agency understood the casino services market to consist of casino-based gaming services (e.g., slots and table games), as well as related amenities such as lodging, entertainment, and food and beverage services.
The FTC usually focuses its attention on a potential combination’s market share of slot machines and table games in a specific metropolitan area to assess the merger’s impact on competition. Specifically, the FTC tends to focus on whether the combined company would be incentivised to raise prices in the form of hold rates, rake rates and table game rules and odds in a manner that would result in consumer harm.
Effects of Potential Merger in Specific Markets
As of December 2018, Eldorado controlled 26 casino properties across 12 states. Caesars’ domestic presence spans across 39 properties in 14 states (see Figures 1 and 2).
Figure 2: Caesars’ Presence in the U.S.
Based on Reorg M&A’s analysis, the two companies overlap in seven metropolitan regions: 1) Atlantic City, N.J., 2) Laughlin, Nev., 3) Reno, Nev, 4) Lake Tahoe, Nev., 5) Kansas City, Mo., 6) Bossier City - Shreveport, La., and 7) Tunica - Lula, Miss. Of the seven areas, the transaction could face divestiture demands in four.
Atlantic City, N.J.
The overlap in Atlantic City could raise competition concerns. Not only will the combined company control a substantial share of the market for both slot machines and table games, the competitive landscape is limited to five other players. Reorg M&A’s calculation reveals that the transaction would lead to a highly concentrated market in Atlantic City, with a post-merger HHI of 2,705 and 3,176 for slot machines and table games respectively. The transaction will result in a significant change in HHI causing regulators to take notice (see Figure 3).
The FTC will need to determine however, if Atlantic City is differentiated from casino markets that were found to be problematic in previous mergers. In Penn National/Pinnacle Entertainment, the commission found that casinos in Kansas City, Mo. and Cincinnati markets “tend to attract customers from the local vicinity, and view one another as competitors.” The commission will likely study if Atlantic City, given its legacy as a gambling city, draws customers from further afield, which could widen the geographic market.
Laughlin, Nev.
In Laughlin, the transaction would result in a moderately-concentrated market. The change in HHI that will result from the merger is 284 and 421 for slot machines and table games respectively. While regulators may scrutinize the impact of the transaction on table game pricing the post-merger market share is likely to be problematic given the number of competitors that can act as a check on any anti-competitive pricing behavior. (see Figure 4).
Reno, is another metropolitan area where the two companies have an overlap. Though there will be a potential concern in the post-merger market concentration in table games, there are nine other major competitors in the geographic market, which will likely mitigate against significant antitrust risk (see Figure 5).
The combination may have to divest assets in the Lake Tahoe area to satisfy regulatory concerns. Preliminary analysis reveals that the Eldorado-Caesars combination will control 56% and 66% of slot machines and table games respectively in the area. This post-merger market structure will likely invite demands for divestitures, particularly in a mountainous geographic area that is not readily accessible. Reorg M&A’s calculation reveals that the transaction would result in a highly concentrated market for both slot machines and table games (see Figure 6).
The combination’s market share in Kansas City region could also pose antitrust questions. Controlling nearly 40% of the slot machines and table games in a market with only one other competitor may lead to divestiture demands from the FTC (see Figure 6). In the Penn/Pinnacle merger, the FTC required the combined entity to divest Pinnacle’s Ameristar Casino to Boyd Gaming in order to prevent control of roughly 60% of the market in the hands of one single entity. With that precedent in mind, it is difficult to fathom how the FTC will greenflag a potential Eldorado-Caesar combination that would control roughly 55% to 65% of the market. Moreover, the transaction would bring the number of major players down to just three. Reorg M&A’s analysis finds that the transaction would result in a highly-concentrated market with a significant change in HHI (see Figure 7).
The combination faces a similar market dynamic in the Bossier City - Shreveport metropolitan region as it does in Kansas City. The combined company would have a significant market share - approximately 45% to 55% - in both slot machines and table games with four other competitors and could result in a highly concentrated market. This region could therefore be an area of focus for antitrust regulators in any review of the transaction (see Figure 8).
Lastly, the two companies share an overlap in the Tunica-Lula metropolitan region. In this area, it does not appear that the companies will be able to exercise significant market power post merger. The transaction would result in a moderately-concentrated market in slot machines. However, the two companies will have substantial control of market share in table games. However, the presence of five other competitors in the market likely mitigates against any major divestiture demands from regulators (see Figure 9).
--Shrey Verma
- Earlier this week, media reports indicated that Caesars was exploring a merger with Eldorado, with activist investor Carl Icahn - who controls three seats on Caesars’ board - actively pushing for the company to pursue a sale.
- Based on Reorg M&A’s analysis, the two companies overlap in seven metropolitan regions: 1) Atlantic City, N.J., 2) Laughlin, Nev., 3) Reno, Nev., 4) Lake Tahoe, Nev., 5) Kansas City, Mo., 6) Bossier City - Shreveport, La., and 7) Tunica - Lula, Miss. Of the seven regions, we find the transaction could ultimately be required to divest assets in four.
- In Atlantic City, the combined company controls a substantial share of the market for both slot machines and table games. Reorg M&A’s calculation reveals that the transaction would lead to a highly-concentrated market in Atlantic City. However, the commission will likely study if Atlantic City, given its legacy as a gambling city, draws customers from further afield, which could widen the geographic market.
- Similarly, the combination may have to divest assets in the Lake Tahoe area to satisfy regulatory concerns. Preliminary analysis reveals that the Eldorado-Caesars combination will control 56% and 66% of slot machines and table games in the area respectively.
- The combined company could also attract divestiture demands in two other metropolitan regions: Kansas City, Mo. and Bossier City - Shreveport, La. In both markets, the Eldorado-Caesars combination will result in highly concentrated markets.
A potential combination between Eldorado Resorts Inc. and Caesars Entertainment could potentially raise antitrust concerns in four metropolitan regions and result in divestitures of gaming properties.
Earlier this week, media reports indicated that Caesars was exploring a merger with Eldorado, with activist investor Carl Icahn - who controls three seats on Caesars’ board - actively pushing for the company to pursue a sale.
Antitrust Analysis
The FTC has significant experience in analyzing mergers in the casino space. The FTC’s conditional approval on the Pinnacle/Penn National merger last year and the agency’s decision in the Ameristar/Pinnacle merger in 2013 will likely inform the regulatory review process with respect to a potential Caesars-Eldorado combination.
In both cases, the FTC defined specific metropolitan areas as relevant geographic markets. Moreover, the agency understood the casino services market to consist of casino-based gaming services (e.g., slots and table games), as well as related amenities such as lodging, entertainment, and food and beverage services.
The FTC usually focuses its attention on a potential combination’s market share of slot machines and table games in a specific metropolitan area to assess the merger’s impact on competition. Specifically, the FTC tends to focus on whether the combined company would be incentivised to raise prices in the form of hold rates, rake rates and table game rules and odds in a manner that would result in consumer harm.
Effects of Potential Merger in Specific Markets
As of December 2018, Eldorado controlled 26 casino properties across 12 states. Caesars’ domestic presence spans across 39 properties in 14 states (see Figures 1 and 2).
Figure 1: Eldorado’s Presence in the U.S.
(Source: Eldorado website)
Figure 2: Caesars’ Presence in the U.S.
(Source: Caesars’ website)
Based on Reorg M&A’s analysis, the two companies overlap in seven metropolitan regions: 1) Atlantic City, N.J., 2) Laughlin, Nev., 3) Reno, Nev, 4) Lake Tahoe, Nev., 5) Kansas City, Mo., 6) Bossier City - Shreveport, La., and 7) Tunica - Lula, Miss. Of the seven areas, the transaction could face divestiture demands in four.
Atlantic City, N.J.
The overlap in Atlantic City could raise competition concerns. Not only will the combined company control a substantial share of the market for both slot machines and table games, the competitive landscape is limited to five other players. Reorg M&A’s calculation reveals that the transaction would lead to a highly concentrated market in Atlantic City, with a post-merger HHI of 2,705 and 3,176 for slot machines and table games respectively. The transaction will result in a significant change in HHI causing regulators to take notice (see Figure 3).
The FTC will need to determine however, if Atlantic City is differentiated from casino markets that were found to be problematic in previous mergers. In Penn National/Pinnacle Entertainment, the commission found that casinos in Kansas City, Mo. and Cincinnati markets “tend to attract customers from the local vicinity, and view one another as competitors.” The commission will likely study if Atlantic City, given its legacy as a gambling city, draws customers from further afield, which could widen the geographic market.
Figure 3: Overlap in Atlantic City, N.J.
Laughlin, Nev.
In Laughlin, the transaction would result in a moderately-concentrated market. The change in HHI that will result from the merger is 284 and 421 for slot machines and table games respectively. While regulators may scrutinize the impact of the transaction on table game pricing the post-merger market share is likely to be problematic given the number of competitors that can act as a check on any anti-competitive pricing behavior. (see Figure 4).
Figure 4: Overlap in Laughlin, Nev.
Reno, Nev.
Reno, is another metropolitan area where the two companies have an overlap. Though there will be a potential concern in the post-merger market concentration in table games, there are nine other major competitors in the geographic market, which will likely mitigate against significant antitrust risk (see Figure 5).
Figure 5: Overlap in Reno, Nev.
Lake Tahoe, Nev.
The combination may have to divest assets in the Lake Tahoe area to satisfy regulatory concerns. Preliminary analysis reveals that the Eldorado-Caesars combination will control 56% and 66% of slot machines and table games respectively in the area. This post-merger market structure will likely invite demands for divestitures, particularly in a mountainous geographic area that is not readily accessible. Reorg M&A’s calculation reveals that the transaction would result in a highly concentrated market for both slot machines and table games (see Figure 6).
Figure 6: Overlap in Lake Tahoe, NV
Kansas City, Mo.
The combination’s market share in Kansas City region could also pose antitrust questions. Controlling nearly 40% of the slot machines and table games in a market with only one other competitor may lead to divestiture demands from the FTC (see Figure 6). In the Penn/Pinnacle merger, the FTC required the combined entity to divest Pinnacle’s Ameristar Casino to Boyd Gaming in order to prevent control of roughly 60% of the market in the hands of one single entity. With that precedent in mind, it is difficult to fathom how the FTC will greenflag a potential Eldorado-Caesar combination that would control roughly 55% to 65% of the market. Moreover, the transaction would bring the number of major players down to just three. Reorg M&A’s analysis finds that the transaction would result in a highly-concentrated market with a significant change in HHI (see Figure 7).
Figure 7: Overlap in Kansas City, MO
Bossier City - Shreveport, La.
The combination faces a similar market dynamic in the Bossier City - Shreveport metropolitan region as it does in Kansas City. The combined company would have a significant market share - approximately 45% to 55% - in both slot machines and table games with four other competitors and could result in a highly concentrated market. This region could therefore be an area of focus for antitrust regulators in any review of the transaction (see Figure 8).
Figure 8: Overlap in Bossier City - Shreveport, LA
Tunica - Lula, Miss.
Lastly, the two companies share an overlap in the Tunica-Lula metropolitan region. In this area, it does not appear that the companies will be able to exercise significant market power post merger. The transaction would result in a moderately-concentrated market in slot machines. However, the two companies will have substantial control of market share in table games. However, the presence of five other competitors in the market likely mitigates against any major divestiture demands from regulators (see Figure 9).
Figure 9: Overlap in Tunica - Lula, MS
--Shrey Verma
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