Caesars Entertainment (NASDAQ:CZR) is likely in advanced talks with William Hill (OTC: WIMHY) on a joint venture that would see the operators spin off a combined online casinos and sports wagering business, perhaps as soon as this year, according to an analyst.
Roth Capital analyst David Bain says the two companies have been in talks for “some time” on a 50/50 partnership that would combine Caesars’ iGaming and sports betting segments with William Hill USA. The Caesars Palace operator already owns 20 percent of the British bookmaker’s US operations.
Checks cite negotiations for ownership structure/splits are in advanced stages, with a mindset of a likely spin off before the end of this year,” said Bain a note to clients. “Of course, there are risks to the time line, including delays in the final throes of talks and overall market conditions.”
The analyst adds that even if the transaction is pushed out to the first quarter of 2021, that time would still beat investor expectations and be a “transformational catalyst.”
Bain rates shares of Caesars “buy” and has a $75 price target on the name, implying upside of about 33 percent from where it currently trades.
Unlocking Caesars’ Big Value
Talk of Caesars separating its online gaming and sports betting segments dates back more than a year. Soon after revealing a takeover offer for Caesars, then Eldorado Resorts CEO Tom Reeg noted a spin-off of those units was possible because markets didn’t fully appreciate those businesses, and such a move would unlock shareholder value.
Reeg now runs the “new Caesars.” On the combined company’s first earnings conference call last month, he said a decision on the fate of the iGaming and sports wagering units could be announced before the end of 2020.
This idea of a joint transaction with William Hill is gaining momentum for multiple reasons, including the UK-based company running all of Caesars’ domestic sportsbooks, it’s status as the third-largest player in the fast-growing US online sports wagering market, and the notion that the investment community doesn’t adequately value William Hill’s US business.
Bain, the Roth Capital analyst, believes a separation of Caesars’ online casino and sports betting units is worth $38 a share, and internet gaming alone is compelling for investors because, in a more equal partnership, William Hill could profitably leverage the more than 65 million Caesars Rewards members, potentially converting some of them into online customers.
Fantastic Earnings Forecast
Bain projects a total addressable market (TAM) of $9 billion for US sports betting and $4 billion for iGaming in 2025. The analyst acknowledges that market share and valuation discount assumptions for Caesars in these arenas relative to rival DraftKings (NASDAQ:DKNG) “could prove conservative.”
Excluding a spin-off, the analyst says Caesars stock is worth $73, citing better-than-expected business trends and strength in the company’s regional portfolio.
“We forecast 3Q20 regional earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) at $397 million versus consensus of $372 million, and Las Vegas at $66 million versus $76 million consensus,” said Bain.
He says Caesars’ ability to outperform peers in the current quarter is being driven by consistent customer demand and cost-cutting initiatives, as well as Total Rewards members driving Las Vegas occupancy rates higher compared to other Strip operators.
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