MGMT COMMENTS AND Q&A
- There was never a deal that was possible at $10.75-11 for CZR… Pricing was done on May 23rd.
- ERI had high $4s/$5 FCF/share before the deal… think they can get to $10/share in FCF post deal
- Bought CZR (including half of Strip) for sub 7x EBITDA, assuming $4-4.5Bn EBITDA
- Synergy # – had to be vetted through – internal target is significantly larger
- “Supremely comfortable” with $500m of synergies
- VICI transaction was innovative
- Market valuing CZR’s EBITDA at 8x up until the deal
- Why $12.75? The incremental value to CZR
- Over $600m incremental value for CZR from the redoing of Vegas leases
- VICI acquisition of real estate at 11.75x represents another $600m of incremental value for CZR
- Centaur – put/call option
- VICI transaction unlocked in total $2bn of CZR value ($2.50 per CZR share)
- Closing procedure
- Licensed everywhere CZR is licensed except Maryland, Kentucky
- Have to get NIGC (National Indian Gaming Commission) approval
- Licensing process is typically 6-7 months
- Antitrust – Northern Louisiana, Kansas City and Tahoe – sales process ongoing …. 1-2% of combined EBITDA – all assets are owned. Non-event in terms of timing
- Internal closing target – end of Q1 2020
- Market pricing 7-8x FCF (post deal announcement)..was at 20-25% FCF yield on Friday (ERI pre-deal)
- Worst case flex in financing – 2 points on $6bn ($120m); $1.5m FCF goes to $1.4m FCF
- Strip – CZR has been outperforming rest of the Strip of late
- ERI bringing 10m customers into the CZR rewards program– should improve the yield in Vegas
- If sentiment on Strip was stronger, this transaction would be impossible
- “In the 3rd quarter of the cycle for the Strip” – which created an opening for ERI
- Icahn – advocated CZR sell to ERI
- Strip/non-strip – happy with asset quality of CZR; Harrah’s Vegas and Flamingo may need some capex
- Customer acquisition marketing represents 30%/40% of TOTAL REALIZABLE SYNERGIES; these are not in the $500m figure because it may or may not be realized.
- Centralization of services can be effective but should not be a blanket manner across all departments
- Synergies buckets of $500m
- Branding
- 80% of $500m is connected to direct savings ($400m) – 3.5% of total revenues
- Looking to cut 2% of full time employee costs
- “Get rid of clunky NAV system driving the car”
- Pro forma total diluted shares: 155m (reverse 6/1 stock split)
- Pro forma: FCF per share $10
- $13bn traditional debt; $12bn net debt
- $21bn rent adjusted debt
- Regional segments to be set up: Missouri/Iowa, and Indiana/Illinois
- Leverage – 5.75x…. want to be in mid-5x at closing
- Generating $1.5bn of FCF per year post transaction (pre-tax)
- Will sell a Strip asset post closing—real estate at 15x, opco 8-10x
- Should pay down $5bn debt rather quickly to get to $16-17bn debt (4ish leverage)
- $2bn of undrawn revolver
- “Easiest debt financing” – CFO comment
- $2.4bn out the door -maintenance capex, lease expense, cash interest expense
- Rollover of the NOLs - $2.6bn get to inherit from CZR, $3.2bn in VICI (tax free), tax cut act (from 30% to EBITDA to EBIT in 2022)- but ERI/CZR rent expense will be fully deductible in 2022… other levered companies are at risk since they’re not prepared for that …..
- To get to CZR’s sub7x on ($4-4.5bn figure) - $685m synergies
- Not assuming a ‘boom’ in Strip revenues- continue to operate in current environment
- If financial crisis happens, everyone gets hurt on EBITDA; in normal environment, some reduction in EBITDA given synergies
- If they can get $500m of synergies, this means same-store EBITDA growth of 15% at least four quarters… if half of $250m synergies, then 7-10% same-store EBITDA growth
- Why little/no interest from other parties on CZR? Not lack of interest, it was lack of ability whether it was current BS structure or turnover in leadership on pursing one or multiple assets
- Cash tax rate post 2022 – should use statutory tax rate
- Participation vs non-participation on slot machines – can find value there.. did it with Trop slot machines which had less win per slot per day. If ERI ran CZR’s machines as ERI currently does its own, it will save $50m in costs
- Procurement savings – insurance, food/beverage, other
- ISLE Customer acquisition costs – announced $35m synergies from ISLE (2-year post acquisition, they realized $70m of ISLE synergies ($25m property level labor, $30-40m ‘customer acquisition’)… will get to $100m synergies at ISLE
- Revenue synergies from CZR Rewards program – do not have much cross-market play (Reno vs vegas)… Centaur has been growing EBITDA 20% since being plugged in… believe they can get 5% revenue growth to get to $100m revenue synergies
- Union vs. non-union – immaterial to labor costs
- CZR Rewards Program integration- should happen in first 12 months
- Total exposure to Illinois – 6-6.5% of combined company
- IL gaming expansion impact- this will take a ‘very long time’ to implement
- Elgin – competition from Rockford property ($10m of EBITDA at risk there)
- Hammond – south suburban/Chicago competitive pressure
- Chicago market is very deep
- Will take a long time for Chicago casino to open
- Effective tax rate of 66% makes economic viability questionable
- Joliet – south suburban impact
- Total EBITDA impact -$20-40m maybe 5 years out ---small impact on financials
- Centaur table legalization will add $50m in EBITDA
- ZERO savings from the $1.9bn of CZR customer acquisition costs
- Still have customer acquisition cost cuts left to do at ISLE properties
- $4.5bn EBITDA =$15 FCF per share
- ERI previously was 2/3 owned and 1/3 leased… will be 50/50 by closing
- Priority will be deleveraging until they hit 4x
