Over the weekend, Eldorado Resorts (ERI) announced it would merge with Caesars Entertainment (CZR) . The deal offers CZR shareholders a 51% premium to Friday's close, and pegs it at a price not seen for slightly more than a year. Ironically, I've seen numbers ranging from $12.70 per share to $13.01 per share. That's because of the structure, and because of the structure, we should be checking out ERI's chart, not CZR's.
ERI is paying $8.40 cash and $4.61 in ERI stock, but that is based on Friday's closing price. It's the 0.0899 shares of ERI that create a bit of the confusion, and a driving reason behind why CZR was trading below $11.50 this Monday morning. With ERI down some 9%, the value of the deal is shifting lower in terms of price per share. Once including around $4.61 in ERI stock value for CZR shareholders, that has fallen to around $4.20. Still, $8.60 in cash plus $4.20 in stock is a $12.60 price, well above the current $11.40 tag CZR was trading.
Checking out the weekly chart of ERI, one can see how technicians could become concerned. The stock is now trading below the bullish channel that has formed throughout the entirety of 2019. This is certainly a yellow flag, but there is an important item to note. This is a weekly chart and it is only Monday. The breakdown potential exists, but can't be confirmed until Friday. Although a crystal clear support line doesn't appear until the low $30s, there has been a lot of trading in the low $40s, which is more realistic support. Based on the current spread, ERI would have to fall some $12 more for the CZR buyout to happen at the current CZR price.
The biggest positive here is Carl Icahn appears to be behind the deal. It sounds as if ERI wasn't the only suitor for Caesar's with Golden Entertainment (GDEN) reportedly interested in the company in the past. And while ERI's chart may not be a thing of beauty, I don't see much standing in the way of this deal. The combined companies will pose a challenge to Las Vegas Sands (LVS) and Wynn (WYNN) , but there's plenty of space in the industry for all three. I believe a small wager on CZR shares here is worthy of consideration, something in the neighborhood of 1%-3% of a trading portfolio, likely to the higher side. Even if the deal falls through, I believe the downside is roughly equal to the upside, and I believe the odds of the deal closing is strong.
I'd be a buyer of CZR on this given there is enough discount remaining that the wait is potentially worth it.
