Is a Caesars and MGM Merger in the Offing?

Caesars Palace in Las Vegas

Though nothing has been confirmed as yet, rumors are swirling around the gaming industry that mammoth firms Caesars Entertainment and MGM Resorts are going to merge. Not only would this shake up the world of gambling, but both companies are heavily invested in hotels and real estate too, so those industries would be affected significantly as well.

How Do We Know About This?

The current wave of speculation about this possible deal was set off by an article in the New York Post dated Nov. 5. The Post, citing an unnamed source, claimed that MGM had retained the services of financial group Morgan Stanley and legal firm Weil, Gotshal & Manges to advise it on matters related to a potential Caesars merger. David Schwartz, Director of the Center for Gaming Research at the University of Las Vegas, commented on the possible impact of such a deal:

“If they did merge, they would have an overwhelming presence here in Las Vegas…I think these companies are always exploring their options…so it’s not really surprising MGM would be considering this right now… If this merger did happen, then probably there would be pressure on other companies to merge, so we’ll probably see something of a ripple effect through the rest of the industry.”

About the Two Companies

MGM Resorts has the second-highest revenue worldwide among all casino companies. Among the iconic Las Vegas properties that it owns are the MGM Grand, Bellagio, Luxor, and Mirage. It has also dabbled in other parts of the country, like Biloxi and Atlantic City, and it has a foothold in the lucrative Macau market with its MGM China location. For the year ending Dec. 31, 2017, MGM Resorts International booked revenue exceeding $10 billion. The company trades on the New York Stock Exchange with the ticker symbol MGM, and it has a market cap of around $14 billion.

Caesars Entertainment is the eighth-largest casino organization in the world. Its prominent brands include Caesars, Harrah’s, Horseshoe, and Bally’s. The company owns 49 casinos in 12 states across the US. While most of its real estate is inside the United States, it does own several properties in the United Kingdom along with a handful in other countries. The corporation trades on the NASDAQ exchange under the ticker symbol CZR. Its market capitalization is around $5.5 billion, and its 2017 revenue was $4.8 billion.

Potential Effects of a Merger

A new corporation created from the combination of MGM and Caesars would have a valuation of about $50 billion. Because both organizations are particularly strong in the Las Vegas and Atlantic City markets, a merger would result in the new entity controlling about half of the hotel rooms in both cities. This may be enough to set off regulatory intervention to thwart a possible monopoly. Among the bodies that could get involved are the Nevada Gaming Control Board, the New Jersey Division of Gaming Enforcement, the Securities and Exchange Commission, and the Federal Trade Commission.

Hedge Funds Responsible

According to insiders, the impetus toward merging has come from several hedge funds with ownership stakes in the two gaming giants. Particularly notable in this regard is Canyon Partners, which has positions in both companies.

Caesars CEO Mark Frissora unexpectedly announced on Nov. 1 that he was resigning although he will remain in his position until Feb. 8. Frissora is against a merger, and it’s widely speculated that the hedge funds were instrumental in forcing his departure.

Other Potential Buyers for Caesars

Caesars has been at the center of acquisition rumors for quite a while. Besides MGM, other casino players that might be interested in buying it include Wynn Resorts and Genting Group. Several private equity investors are also suspected as potential purchasers. Caesars Entertainment has recently fended off a takeover bid by Golden Nugget owner Tilman Fertitta.

Sports Betting a Key?

The New York Post also leaked the information that Morgan Stanley reported to MGM that the U.S. licensed sports betting market could grow to $216 billion wagered per year. The estimated revenue from these bets would run close to $11 billion annually. This figure represents more money than either MGM or Caesars pulls in yearly, and so it’s possible that any merger that eventuates could be driven by a desire to capture some of these profits.

The focus is on the new regulated sports betting states: New Jersey, Delaware, Mississippi, Pennsylvania, and West Virginia. Both MGM and Caesars are strong in New Jersey. However, of the other states listed above, MGM owns only a couple of facilities in Mississippi. Caesars, with its Harrah’s Gulf Coast, Tunica Roadhouse Casino and Horseshoe Casino Tunica, could expand this Mississippi footprint while giving MGM exposure to the nascent Pennsylvania sportsbook scene through its Harrah’s Philadelphia property.

Furthermore, MGM would be able to expand its online offerings if it brought Caesars into its fold. The Caesars Interactive Entertainment subsidiary runs the internet poker room, which operates legally in New Jersey and Nevada. Both the NJ and NV wings of the WSOP poker site pool their traffic, and players from Delaware also contribute to this shared poker liquidity.