EUR 850.00 For Business Accounts Only

Morningstar | Proposed Caesars and Eldorado Combination Not Enough to Warrant a Competitive Moat

On June 24, 2019, Eldorado proposed to acquire Caesars for $12.75 per share (scheduled to close during the first half of 2020). Our view is that such a tie-up would not be enough to warrant a moat rating change, given that the increased exposure to low barrier U.S. gaming markets of the combined company, remains intact. That said, the merger would roughly double Caesar's domestic properties to around 60 and lift loyalty membership to 65 million from 55 million, resulting in a marginally improved competitive position.On a standalone basis, we think Caesars Entertainment will sustain its competitive positioning in lower-growth, lower-barrier Las Vegas (58% of estimated 2019 EBITDAR) and other U.S. regions (46%). (Caesars' other properties are forecast to generate negative EBITDAR in 2019). There is increasing competition from new casino supply and peer investment into existing assets. However, we see Caesars maintaining market share as it continues to allocate capital into renovating current properties and opening new development facilities, such as its Las Vegas convention center in 2020. These initiatives provide the opportunity to leverage the company's marketing efforts and its 55-million loyalty membership base (MGM's program has 32 million).Despite all this, Las Vegas and other U.S. gaming regions do not contribute to a moat for Caesar. U.S. gaming demand is lower than in Asian regions like Macau and Singapore, where the propensity to gamble is much higher. Also, the 1,000 commercial and tribal casinos in the U.S. have a total population of 325 million represent gaming supply, well in excess of the 41 and two casinos found in Macau and Singapore, respectively, with a Chinese and Singapore population of 1.4 billion and 5.6 million, respectively. Further, we expect supply growth in U.S. gaming to increase over the next five years with two resorts opening in Las Vegas that add a mid-single-digit percentage to market room supply and expansion of state gaming facilities. This compares to negligible additions in either Macau (we expect only one integrated resort to open the next 10 years) or Singapore (we see no additional licenses for the foreseeable future).