Thu 04/02/2020 13:44 PM
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Takeaways
 
  • Eldorado Resort Inc.’s financial position allows the company to theoretically afford regulatory delays in its acquisition of Caesars Entertainment Corp. through the end of this year and as late as February 2021. According to the merger agreement, the deal may be extended from June 24 to Sept. 24 and then to Dec. 24 if only the regulatory approvals, including HSR and state gaming approvals, remain outstanding.
  • In addition to the cash flexibility available to Eldorado, the merger agreement also contains provisions that insulate the transaction from certain financing issues. Section 5.16 of the merger agreement provides that Eldorado has agreed that debt financing is not a condition to closing.
  • Furthermore, Eldorado may find that staying the course suits the company better than choosing to abandon the merger. The company could also argue to state regulators that any eventual rejection of the merger could stress its balance sheet and lead to job losses - an outcome that regulators will likely seek to avoid. Additionally, Caesars’ shareholders may find that being amenable to changing certain deal terms in order to provide Eldorado greater financial legroom to weather the storm could be in their interest.

There are key financial considerations that will encourage Caesars and Eldorado to continue moving forward and navigate the extended review process by state gaming regulators, including those in Nevada and New Jersey.

As Reorg reported yesterday, April 1, several gaming regulator specialists expect state-level gaming commissions to re-examine the financing provisions of the deal and whether the new debt load would strain the finances and future operations of the combined company.

In addition to navigating the regulatory process at the state level, Eldorado must pay a “Ticking Fee” of $2.3 million, starting on March 25, to Caesars that accrues daily and is due at close. The ticking fee provision calls for Eldorado to pay Caesars $0.00333 per day for every share of Caesars’ common stock. According to the merger agreement, the aggregate share amount may be increased upon conversion of Caesars' senior 2024 convertible notes at a conversion rate of 0.139 shares for $1 of principal amount. If the 2024 notes are converted into equity, the daily ticking fee for Eldorado could swell to $2.8 million per day. On the conference call accompanying the deal’s announcement in June 2019, Eldorado’s management said it expects the convertible notes to be converted into equity.

After drawing down $480 million from its available revolving credit facility, Eldorado’s total liquidity position is estimated to stand at about $723 million. This includes the $241 million in cash and marketable securities that the company held as of Dec. 31, 2019.

The above math essentially means that Eldorado has a cash balance totaling $723 million and that the company could theoretically afford regulatory delays through the end of this year and as late as February 2021. According to the merger agreement, the deal may be extended from June 24 to Sept. 24 and then to Dec. 24 if only the regulatory approvals, including HSR and state gaming approvals, remain outstanding.

In addition to the cash flexibility available to Eldorado, the merger agreement also contains provisions that insulate the transaction from certain financing issues. Section 5.16 provides that Eldorado has agreed that debt financing is not a condition to closing. The same section requires Eldorado to give Caesars prompt written notice if any of the debt financing banks threatens to withdraw from the syndicate. Further, if one of the financing banks withdraws from the syndicate, the agreement requires Eldorado to obtain replacement debt financing on the same, or better, terms as was originally agreed to in the financing commitments.

Furthermore, Eldorado may find that staying the course may suit the company better than choosing to abandon the merger at this point.

First, as Reorg analyzed previously, Eldorado faces a high legal hurdle to walk away on the grounds of Caesars facing a material adverse effect, or MAE. Moreover, because the casino shutdowns have been ordered by governors at the state level, Ceasars’ actions in response to the coronavirus outbreak have official sanction - likely satisfying the covenant in the merger agreement requiring the company to be “in compliance with Law” while conducting business in the ordinary course.

Second, Eldorado could argue to state gaming commissions that a considerable delay in the regulatory process and eventual rejection of the merger would not only expose the company to a significant ticking fee running into hundreds of millions of dollars but also an $837 million reverse termination fee. Such a hit, when assessed against Eldorado’s current cash position of $723 million, would lead to a serious liquidity crunch for the company. The crisis could further exacerbate if the industry fails to rebound after official lockdown measures are lifted. Eldorado’s stressed balance sheet may lead to further job losses - an outcome that regulators will likely seek to avoid.

As Reorg reported Wednesday, gaming experts as well as former state officials believe that despite uncertainties about the financing of the transactions, regulators in New Jersey and Nevada have historically been inclined to approve transactions.

Dan Heneghan, a former state official with the New Jersey Casino Control Commission, noted that New Jersey may impose a variety of conditions on the company to justify approving the transaction in an effort toward improving the financial stability of the combination post-merger. In that context, both Eldorado and Caesars may have to agree to stricter post-merger conditions that could eat into the $500 million in synergies promised at the time of deal announcement.

Lastly, there is a possibility that Caesars’ shareholders may be amenable to changing certain deal terms in order to provide Eldorado greater financial legroom to weather the storm. Based on current Eldorado stock prices, Caesars’ shareholders can expect $8.40 in cash, 86 cents in ticking fees (assuming the merger closes in December), plus 98 cents in Eldorado stock (based on current prices), thus amounting to a total consideration of $10.24. In the event that Eldorado terminates the merger, Caesars’ shareholders will be left with approximately $1.23 in reverse termination fees plus the stand-alone value of Caesars stock. Assuming a 7.5x EV/EBITDAR multiple and forward EBITDAR of $2.4 billion, Caesars’ break price could hover around the $7 mark. That would imply a total value of $8.23 for Caesars’ shareholders in the event the deal breaks.

As a result, Caesars’ shareholders would find it in their interest to back Eldorado to adopt a patient approach to the regulatory review process at the state level.

Reorg’s previous coverage of this transaction can be found HERE.

--Shrey Verma
 
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