Rumors are spreading that MGM may offer a takeover bid for Caesars Entertainment. The New York Post cited an unnamed gaming source “close to the situation” as saying “The next 3 to 4 months will be fascinating.” If that has any implications for an actual timetable, we’re talking about some very dangerous timing here.
Remember that what began the whole saga of Caesars’ ungodly debt fiasco was a leveraged buyout by Apollo Global Management partnered with a few other funds at the worst possible time right at the beginning of the worst recession since the Great Depression. If anyone high level involved in that deal knew anything about business cycle dynamics, they would have waited another 6 months for Caesars to be repriced if they were still interested. At that point it was 7 years since the last recession that had taken place in 2001.
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We are now 10 years past the 2008 financial crisis with signs of a turn proliferating throughout the economy with quite a few potential triggers ahead of us in the exact 3 to 4 month time frame that a deal may go down.
Not that acquiring Caesars is in itself a bad idea. It all depends on the terms, which are based on projections, which better be correct in order to justify whatever valuation they come up with. Like President Donald Trump, most successful businessmen have little grasp of the workings of the business cycle within which they operate. If business leaders did understand it, there wouldn’t be one. What characterizes the turn of the business cycle is that business are all caught off guard together.
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So it’s safe to assume that the executives in charge of pushing any sort of deal through have no better grasp of economic cycles than did Apollo’s senior management back in 2008.
If the number crunchers at MGM and Caesars are merely projecting out current trends as if they will be forever linear and coming up with valuations based on those sorts of assumptions, things probably aren’t going to turn out too well. Will it be as bad as the Caesars/Apollo fiasco of 2008? That’s hard to know and I won’t try to answer that one.
But it’s looking more and more likely that, a few months from now, the volatility cat that is coming out of the bag now is going to be a lot angrier and more volatile come 2019. Caesars will be valued lower than it currently is, and MGM will find itself trudging through another difficult period.
The evidence: Visitor volumes are starting to slack off in Las Vegas. According to MGM’s latest earnings, table games drop is down 11% year over year on the Strip. Slot handle is down 2.2%. Occupancy is down from 95% to 93%. Revpar is down 4%.
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Average daily rate is down 2%.
Domestic resorts outside of the Las Vegas Strip are doing better with volumes up so there are some mixed signals, but important to keep in mind here is that Las Vegas is right next door to the strong money flows linking the Federal Reserve and Silicon Valley where much of the speculative money printed by the Fed first ends up, often with significant spillover into Las Vegas. The early turning of the business cycle should affect Las Vegas before it affects the rest of the United States.
Same story with Caesars. Earnings were generally well-received, but enterprise-wide Las Vegas revenues were still down 2.4% year over year for the quarter. Lower hotel revenues as well for Caesars in Las Vegas. The rest of the country is doing a bit better.
We’ll see about next quarter though. If the business cycle is indeed turning, the effects should start to widen out from Las Vegas over the next few months, which is precisely why closing a deal with Caesars over the next 3 to 4 months could put MGM in a precarious situation.
Nevada real estate sales and pricing are also stagnating or heading down. According to Trulia, Las Vegas real estate prices haven’t moved since May, and sales are down 6%. Sales are of course seasonal, but the peak was hit a long time ago now in summer 2017 at 9,485 units.
This year’s peak was 8,204, 13.5% lower.
MGM’s debt situation is not as healthy as it once was. It’s not desperate or anything, but taking on Caesars’ remaining debt at this point doesn’t seem like the greatest of moves. MGM is already leveraged nearly 100% already, and it’ll get there if the stock keeps drifting downward, which I expect it will.
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Caesars is already leveraged over 100% again, not counting lease obligations, so combining these two now would see stable interest payments at best with declining revenues in the upcoming quarters.
If MGM wants to make a move, they should wait a few months. The global economic picture should be a lot clearer around March 2019. By then we’ll have a much clearer idea of where we are in the business cycle, where the China/US trade war is heading, which affects MGM through MGM China, and what currency markets will look like post Brexit and post cessation of European Central Bank bond buying.
None of these things should be the concern of casino executives at all. But the global economy is what it is and both MGM and Caesars live within it, like it or not. If MGM is worried about Wynn or Genting Group or Blackstone sniping them as rumored in the NY Post piece, then let them deal with the consequences.
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If the next recession ends up being particularly bad, MGM may get another shot at the same assets a few years down the road under better financial conditions and a better price.
The best candidate to acquire Caesars now would probably be Blackstone. They have the dry powder necessary to finance the transaction with ample breathing room and they are the least leveraged of those rumored to be interested.