MGM Resorts Can Weather Competitive Storms as Rival Caesars Entertainment Prepares to Join Eldorado

Posted on: June 26, 2019, 11:30h. 

Last updated on: June 26, 2019, 03:33h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

News of Eldorado Resorts, Inc.’s (NASDAQ:ERI) $17.3 billion acquisition offer for Caesars Entertainment Corp. (NASDAQ:CZR) is reverberating throughout the casino gaming industry, but one analyst sees negligible impact of that deal on MGM Resorts International (NYSE:MGM).

MGM’s Borgata in Atlantic City, a market where it competes with Eldorado Resorts. (Image: NJ.com)

MGM, the largest operator on the Las Vegas Strip, currently has some regional gaming properties in markets where Eldorado also does business, including Atlantic City and Mississippi, but that doesn’t mean the combined Eldorado/Caesars presents a threat to MGM investors.

We estimate these regional properties amount to 10% and 11% of total 2019 EBITDA and sales for MGM, respectively, and could see an annual revenue impact of around 1% in 2021-28,” said Morningstar gaming analyst Dan Wasiolek in a note out Wednesday. “As a result, we don’t plan to change our $38 fair value estimate for no-moat MGM, and we continue to find the shares attractive.”

That $38 fair value forecast is well above where shares of the Bellagio operator reside today. At this writing, the stock traded just under $28.

Competitive Markets

MGM operates two casinos in Mississippi – the Beau Rivage in Biloxi and Gold Strike in Tunica – while Eldorado runs three gaming properties that are within two-hour drives of those MGM venues. Morningstar sees Eldorado being able to pilfer some revenue from MGM’s Mississippi properties due to the former bringing Caesars’ sought after customer rewards program into its mix.

“In total, we calculate that these three Eldorado facilities can produce around $200 million in revenue this year and see around a mid-single-digit percentage lift to sales with the integration of Caesars’ loyalty program, based on past results from Caesars’ integrations,” said Wasiolek.

The analyst estimates Beau Rivage and Gold Strike could each see annual revenue slip by one percent as Eldorado fortifies its presence along the Gulf Coast.

Atlantic City is another market where MGM and the combined Eldorado/Caesars could butt heads. For now, Eldorado and Caesars own four of the nine casinos there, though rumors are swirling Bally’s could be slated for closure as the two companies join forces.

MGM’s Borgata is the top revenue producer on the Boardwalk, but one of its chief rivals is Eldorado’s Tropicana, which could also see a revenue boost from the addition of the Caesars Total Rewards program.

“We calculate that Tropicana generates around $300 million in revenue this year and expect the same mid-single-digit percentage sales lift from leveraging Caesars’ loyalty program, which again stands to have around a 1% impact on average to MGM’s Borgata annual sales in 2021-28,” said Wasiolek.

Geographic Advantages

As has been widely noted, Eldorado’s deal for Caesars brings the Reno-based regional gaming company into Las Vegas for the first time, but MGM is expected to maintain its dominant Strip perch. Morningstar forecasts MGM’s Strip venues, including MGM Grand and the Mirage, will account for 45 percent of the company’s 2019 revenue and half its earnings before interest, taxes, depreciation and amortization (EBITDA) this year.

Additionally, MGM has exposure to lucrative markets where neither Eldorado nor Caesars operate, including Macau.

“MGM Resorts has expanded its room share in Macau to 8% from 3% with its Cotai property, which opened in February 2018,” said Wasiolek.

The company is also believed to be one of the frontrunners for one of the prized Japan casino gaming licenses and Morningstar believes MGM will be one of the winners in that quest, which could see integrated resorts open there in the middle of the upcoming decade.