$500 million in Eldorado-Caesars cost savings? Analyst says make it $600 million By Howard Stutz, Executive Editor, CDC Gaming Reports July 9, 2019 at 6:05 pm Union Gaming Group’s John DeCree labeled it “the $500 million question.” In the two weeks since Eldorado Resorts and Caesars Entertainment announced their $17.3 billion merger agreement, the investment community is still coming to grips with how the companies will implement $500 million in synergies – i.e., cost savings – in the first 12 months after the transaction closes. DeCree told investors in a research report Monday that history is a good judge. Reno-based Eldorado has grown through five major acquisitions – MTR Gaming in 2014; Reno’s Silver Legacy and Circus Circus from MGM Resorts International in 2015; Isle of Capri Casinos in 2017; and the Grand Victoria riverboat in Elgin, Illinois, and Tropicana Entertainment last year. In nearly every deal, the once-family-owned Eldorado swallowed the larger fish. And, in each deal, Eldorado has achieved its predicted cost savings in the first year – a combined $118 million of synergies through 2018. “We’ve got a proven track record, through multiple acquisitions, of exceeding our announced synergy targets,” Eldorado CEO Thomas Reeg said on a conference call with analysts on June 24, hours after news of the deal crossed the wires. “We have exceeded our synergy targets both from timing and (by) actual amount in every transaction that we have done as a public company.” Granted, the projected cost savings from the Caesars deal far exceeds the combined synergies of Eldorado’s previous transactions. Of course, so does the combined acquisition, which includes $8.5 billion in stock and cash along with debt assumption and other costs. John DeCree, Union Gaming The deal creates a casino company that currently holds some 60 properties in 16 states, although that figure is expected to change after several anticipated property sales intended to alleviate federal antitrust issues. “Some investors are less familiar with Eldorado’s track record in prior acquisitions, while others are simply a little skeptical,” DeCree said. “We are increasingly confident in management’s execution abilities and are raising the bar to $600 million of synergies.” If that happens, Eldorado’s stock price could be worth $70 a share once the deal closes in 2020, DeCree said. Shares Tuesday closed at $48.19 on the Nasdaq. “Although past performance is clearly not a guarantee of future performance, our analysis does show management’s sound track record of acquisition, integration, and disciplined capital allocation,” DeCree said. His isn’t a lone voice. SunTrust Bank gaming analyst Barry Jonas said Eldorado’s $500 million synergy was achievable given the company’s “strong track record with prior M&A.” Eldorado CEO Thomas Reeg Comments from Reeg and current Caesars CEO Tony Rodio suggest that the casino giant – which completed a two-year bankruptcy reorganization in 2017 that sliced roughly $16 billion from the books – remains a bloated company with areas that can be carved out. “From my perspective, the synergies are described (in) the transaction are achievable,” Rodio, who has been on the job for two months, said on the conference call. “I’ve identified opportunities to reduce corporate cost on a stand-alone basis. Additionally, there are opportunities that will be created by combining the two companies, including the reduction of duplicative structures and increased purchasing power.” The immediate cuts seem to focus on labor costs, particularly on the corporate level. Reeg said on the call that Caesars’ “centrally managed” base of operations has 3,200 people with a “cash operating cost” of $600 million. Eldorado’s corporate office currently has 200 people with $40 million of centralized cost. “So the opportunities here are in that structure (and) reduction in public company cost,” Reeg said. He added that merging Eldorado’s casinos into the Caesars Rewards player loyalty program will be a revenue enhancement. Reeg said Caesars also “spends a lot of money with third-party professionals” – more than $60 million in the last 12 months. He said Eldorado spent $2 million on outside help. “There is some property-level opportunity,” Reeg said, adding there was “more layering than we typically have in our portfolio.” Eldorado, which has resorts in Reno, Lake Tahoe and Laughlin, has long wanted a presence in Las Vegas. The company is acquiring Caesars’ nine Strip-area properties in the merger but has said it will sell one or two. If the Las Vegas gaming community is apprehensive, it has good reason. Job reductions have been happening at many of the largest Strip resorts – quietly at some companies, but very publicly at MGM Resorts, which has sliced more than 1,000 positions from its workforce. Las Vegas’ Culinary Workers Local 226, which represents some 60,000 nongaming resort employees, said it will be watching the synergy moves carefully. “Where are they going to cut?” D. Taylor, International President of UNITE HERE, the parent union of the Culinary, said in a statement. “We will not stand by idly if the proposed Caesars-Eldorado transaction will lead to significant job losses, worse wages and benefits for our members, and lower state gaming tax receipts in the many communities where members we represent work and live.” A labor concern is already brewing in South Florida. Union employees at Eldorado’s Isle Casino Pompano Park voted to authorize a strike last weekend, according to statement from UNITE HERE Local 355. The union said one-fifth of the property’s work force was laid off after Eldorado acquired the casino in the Isle of Capri purchase. Despite Eldorado’s positive history, cost savings can get messy. Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at email@example.com. Follow @howardstutz on Twitter.