Eldorado completes Caesars deal, run for the hills


If I were an Eldorado shareholder, the following sentence from MarketWatch would scare the proverbial pants off my proverbial self:

A Nevada company that started in 1973 with a single hotel-casino in Reno announced Monday it has completed a $17.3 billion buyout of Caesars Entertainment Corp. and will take the iconic company’s name going forward as the largest casino owner in the world.

Let’s go back 12 and a half years? This is from the Las Vegas Review Journal, January 29, 2008:

Harrah’s Entertainment’s first day as a private company pretty much lived up to what the company promised two months ago: “a change in ownership, but not a change in direction.”

One of the few noticeable changes: the company’s stock will no longer be listed on the New York Stock Exchange or other boards after Monday’s completion of the $17.7 billion buyout of Harrah’s Entertainment by two private equity firms.

Little did Apollo know it back then, but the last $17 point whatever billion Caesars deal was doomed from the very start. That crazy deal was first made public in 2006. By that time the housing bubble had already popped. Few people knew that at the time (some did), but fate was already sealed for a financial crisis. That financial crisis took about two years to filter down through the system once it was triggered. The same exact thing is happening right now, except now it’s much, much more obvious, and much, much worse. It was possible to deny there were any systemic problems in 2006 if you didn’t understand credit cycles. Now, not so much.

Just like 14 years ago in 2006, the fate of this new Caesars deal is already sealed. It’s doomed. There is absolutely no chance that this is going to work. Why in the name of all the fictional financial gods, goddesses, and nongendered deities would you want to become the largest casino owner in the world specifically now? It’s like taking on a bunch of anvils right when you’re about to cross seriously rough seas. Just when commercial mortgages are defaulting at a record pace, unemployment is at Great Depression levels, and the entire global banking system is about to completely implode, they’ve taken on the most indebted casino firm in the world.

Eldorado and Caesars are now going to drown together. They will not survive this. This time there will be no bailouts like there were for Apollo in 2017. By the time it is even recognized that a bailout will be needed, the dollar itself will most likely be on its deathbed.

How is CEO Tom Reeg justifying this? He probably had no choice. There were already billions in commitments made. Here’s what he said to Bloomberg though, for what it’s worth:

The Federal Reserve helped the company sell the loans by pushing official interest rates to almost zero, Reeg said. Early, strong results from casinos, which began reopening in May, also provided a boost.

“Customers were effectively trapped in their homes for three months,” said Reeg, who has been with Eldorado for almost a decade. “They were anxious to get out and be entertained. They were looking for places they could go, drive to, go back home. It was perfect for the regional casinos.”

There’s some great pearls of wisdom here. First of all, the Fed gave us the money and we took it, he says. Great. That’s what the credit cycle is, and Eldorado/Caesars is about to be taken out to the woodshed and whipped by it. Second, he notes that people are “looking for places they could go, drive to and go back home.” Interesting. Casinos are places to drive to and go back home. Well then, sounds like great times ahead forever.

The dollar is now plummeting on foreign exchanges. It’s only a matter of months at most before this shows up in much higher consumer prices and then bleeds into the bond market. The entire planet is deglobalizing, trade is breaking down, so where are mid-market casino patrons getting the money to gamble at all? Debt and stimulus checks. Not all of them obviously, some people still have some money. But a lot fewer people have money now than had back at the beginning of the year. Instead, the money is going to companies like Eldorado to help them finance unsustainable business combinations. What the Fed is actually doing by giving Eldorado the money to finance this mess is effectively taking money away from the same consumers that would otherwise have spend it at these casinos in the first place. It’s basically frontloading Caesars’ and Eldorado’s future revenues to Eldorado in order to enable a business merger that would otherwise be impossible. It would be impossible for good reason.

Money grows at the Federal Reserve as much as it grows on trees. It just doesn’t. All the Fed can do is dilute and redistribute. There is no such thing as magic in finance.

The math is so simple I can’t see how they don’t see it. Maybe they do and they’re just getting their parachutes ready. Caesars’ interest expense in 2020 is projected to be $1.354 billion. Operating income $390.6 million. In the best case scenario of synergy and recovery from COVID-19 fear, operating income might inch up gradually, but it’s not going to be enough to cover interest expense, let alone operate at a consistent profit. The debt Eldorado is taking out to finance this deal thanks to the Fed, is going to have to be rolled over long before it comes due. At that point if the dollar hasn’t collapsed completely yet, the Fed will own pretty much the entire bond market.

Deutsche, one of the other zombies involved in this deal, is now projecting that the Fed’s balance sheet will reach $20 trillion within the decade. That’s the size of the entire US economy. In my view it’ll get to $20 trillion much sooner, within 2 years is my guess, if it can even get that high before the dollar is completely rejected as a unit of account.

If you own Caesars, be thankful for the Eldorado bump and get out now.