Caesars: Report of Icahn Investment Boosts Shares, but We See Little Reason for Activism

No-moat Caesars Entertainment's shares moved 11% higher during May 31 trading on a Bloomberg report that activist investor Carl Icahn has built a sizable position in the company, according to people familiar with the matter. Icahn had previously invested in Caesars during 2019 and helped push the successful merger with Eldorado. Now, Caesars management is made up of the former Eldorado team, which has a very successful record of integrating large acquisitions, deriving synergies, and working down debt levels. The executive team has succeeded in integrating Eldorado with Caesars and has extracted more than $1 billion in cost synergies, which was above its initial $400 million target. Further, it has lowered Caesars’ debt/adjusted EBITDA to 6.4 times in 2023 from 8.8 times in 2021, and we forecast the ratio to fall to around 5 times by 2026. Reducing debt ratios remains the top capital allocation priority, in our view, and we maintain our Exemplary Capital Allocation Rating. Thus, if the report of an Icahn investment is accurate, we see little merit for it to be led by activist reasons, but rather an investment in an undervalued name. Caesars still trades at a 50% discount to our unchanged $69 fair value estimate, even after the strong move higher.