Eldorado to absorb gaming, hotels as Carl Icahn sells Tropicana
Billionaire activist investor Carl Icahn's company is selling its controlling stake in auto parts maker Federal-Mogul for $5.4 billion. Fred Katayama reports. Video provided by Reuters
Reno-based Eldorado Resorts’ growing gaming empire expanded its territory locally and nationally with two major acquisitions, including a purchase of billionaire investor Carl Icahn’s Tropicana Entertainment casinos.
Eldorado (NASDAQ: ERI) entered into a joint agreement with Pennsylvania-based real estate firm Gaming and Leisure Properties (NASDAQ: GLPI) to acquire Icahn Enterprises’ majority-owned Tropicana assets for about $1.85 billion.
The deal includes properties across several states as well as one hotel-casino closer to home. Stateline’s MontBleu Casino Resort & Spa in Lake Tahoe is part of the properties listed in the deal. Previously known as Caesars Tahoe, the property was remodeled by Tropicana Entertainment for more than $24 million in 2014.
The acquisition also includes Tropicana's flagship Tropicana Casino and Resort in Atlantic City. Other properties in the deal include the Tropicana Laughlin Hotel and Casino, Tropicana Evansville in Indiana, Belle of Baton Rouge Casino & Hotel in Louisiana, Trop Casino Greenville in Mississippi and Lumière Place in Missouri.
The market responded positively to the announcement, with Eldorado stock jumping by more than 16 percent to $41.50 at the closing bell Monday.
As part of the deal, Gaming and Leisure Properties, will pay $1.21 billion to acquire nearly all of Tropicana’s real estate. Eldorado, which will pay the remaining $640 million for the purchase, will enter into a 15-year master lease for the property and pay an estimated $110 million to Gaming and Leisure Properties each year. Eldorado also has the option to renew the lease for up to 20 years.
Deals involving real estate investment trusts or REITs are now commonplace in the gaming industry, said Ken Adams, a gaming analyst with CDC Consulting. Hotel-casino heavyweights such as MGM, Caesars and Penn National Gaming, for example, have used the REIT model, which is seen as a way to improve value for the company and pass and potential savings, including tax savings, to stockholders.
By using the REIT structure, Eldorado will see a lower cost of entry for the acquisition as well as lower financing costs compared to what it would normally pay if it did the deal by itself.
“The Eldorado is essentially getting a $2 billion property for $640 million,” Adams said. “For the (Gaming and Leisure Properties) REIT, unless the property fails, they get guaranteed income so it’s pretty suitable for them.”
Eldorado also announced a second acquisition on Monday — a $327.5 million purchase of the Grand Victoria Casino in Elgin, Illinois.
The Tropicana and Grand Victoria acquisitions are in line with continued efforts by the company to diversify its gaming portfolio, said Gary Carano, Eldorado chairman and CEO. Eldorado Resorts owns and operates 20 properties in 10 states, including Nevada, Colorado, West Virginia and Florida.
“The acquisition of seven Tropicana Entertainment properties will allow Eldorado to enter two new gaming jurisdictions and deliver additional financial and geographic diversity to our operating base,” Carano said in a statement.
Diversification is even more important given the challenges that individual gaming markets face today, Adams said. Two of the territories that Eldorado is entering following Monday’s acquisitions, for example, come with risks of their own.
Tropicana's flagship Tropicana Casino and Resort is located in Atlantic City, N.J. In addition to the long-documented struggles of the city’s gaming, increased competition from surrounding areas is also eating into Atlantic City’s traditional markets.
Pennsylvania, for example, used to account for 50 percent of Atlantic City’s business before it had its own gaming operations, Adams said. New York, meanwhile, has several tribal casinos while other traditional markets such as Massachusetts, Maryland and Connecticut now have casinos available as well. This makes it tough to project where customer growth will come from, Adams said.
“The question becomes, can they maintain and stabilize their revenue,” Adams said. “The only upside is online gaming, which has been up 20 percent per month in Atlantic City and has made up for the decline in casino revenues.”
Even Atlantic City’s positive online revenue could be at risk depending on the outcome of a New Jersey online sports betting case at the U.S. Supreme Court, Adams cautioned.
In the case of the Illinois market, the risk involves slot machines in bars and the vagaries of local government. Illinois bars have about 28,000 slot machines, a number that can potentially go up to 40,000, Adams said.
“Slots in bars have traditionally take revenue from casinos,” Adams said. “Illinois is also risky because you never know what will come out from legislation.
At the same time, Adams says that the Eldorado has done a great job in expanding and diversifying its portfolio. Eldorado’s last couple of years have been particularly “impressive,” turning the company into a national player that no longer lives or dies with its Reno market.
Icahn, meanwhile, says the casino empire he is selling to Eldorado and Gaming and Leisure properties is far different than the one his company acquired several years ago.
Widely known for his activist investing and his past business ties to fellow casino baron Donald Trump, Icahn claimed credit for rehabilitating Tropicana since first backing the company in 2008.
He said Monday in a statement the company was “bankrupt and desperately needed new leadership” when he first stepped in.
“We identified this undervalued asset as being a perfect situation to deploy our modus operandi, by which we seek to acquire undervalued assets, nurture, guide and improve their condition and operations, and to ultimately greatly enhance value for all shareholders,” Icahn said.
He credited a strong management team led by CEO Tony Rodio and a strategy of “reinvesting every single penny of profits back into the company” for helping Tropicana get back on its feet.
The sale includes 7,900 slot machines, 265 table games and about 5,400 hotel rooms, as well as restaurant, retail and entertainment hotspots.
The sale does not include the Tropicana Aruba Resort and Casino, which will be sold separately.