“We see risk to Eldorado obtaining funding needed to close on its proposed acquisition of Caesars, considering Caesars and Eldorado’s high balance sheet leverage, as the coronavirus' material impact on leisure and travel demand creates heightened uncertainty,” Wasiolek wrote in a note to investors.
Casino operators were forced to temporarily shut properties in March as states enacted shelter-in-place measures due to COVID-19.
Wasiolek says the planned $17.3 billion tie-up between the gaming companies expected to close in 2020 will result in only a marginally better competitive position for Caesars, which owns some of the most iconic properties on the Las Vegas strip.
“A merger would roughly double Caesars' domestic properties to around 60 and lift loyalty membership to 65 million from 55 million, resulting in a marginally improved competitive position,” he added.
Wasiolek predicts Caesars will keep its market share in “in lower-growth, lower-barrier Las Vegas” as it continues to renovate properties and opens its planned Las Vegas convention center in 2020. However improved casino sites in the U.S. won’t necessarily translate to a competitive advantage.
“U.S. gaming demand is lower than in Asian regions like Macau and Singapore, where the propensity to gamble is much higher,” said the note.
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Wasiolek goes on to say there are many more casinos in the U.S. than in Macau and Singapore, where gaming is more popular.
“The 1,000 commercial and tribal casinos in the U.S. serve a total population of 325 million, well in excess of the 41 and 2 casinos found in Macau and Singapore, respectively, with Chinese and Singapore populations of 1.4 billion and 5.6 million, respectively,” the note said.
To make matters worse, more U.S. competition is expected over the next five years with two resorts opening in Las Vegas.
“Further, we see a low probability of Caesars gaining license exposure to higher-ROIC overseas markets that have higher barriers of entry, as we expect only a few such opportunities to become available with the winners likely being operators with stronger operational track records,” wrote Wasiolek.
Caesars shares are down about 21% year-to-date. The gambling giant temporarily shut down its North American properties in mid-March amid COVID-19 and furloughed most of its workers. It recently announced sanitation and social distancing measures as part of its plans for re-opening its properties.
Eldorado shares are down 48% year-to-date. In its latest quarter, the company reported an operating loss of $123.2 million compared to an operating income of $123.6 million a year ago. The company was forced to temporarily close all of its casinos by March 18 due to COVID-19. Some of its properties, however, have begun to re-open.
Ines covers the U.S. stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre