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Why Casino Stocks Jumped Big

Thursday, April 2, 2020   /   by Ken Couture

Why Casino Stocks Jumped Big

What happened 

Shares of some of the largest U.S. casino companies jumped in trading Tuesday on relatively positive deal-related news. The stock of Eldorado Resorts (NASDAQ:ERI) rose as much as 26.4% before closing up 19.5%. Caesars Entertainment (NASDAQ:CZR) gained 17% before settling up 5.3%. Finally, shares of Penn National Gaming (NASDAQ:PENN) climbed 15.8% and closed up 8.5% for the day. 

So what

Eldorado is in the process of buying Caesars Entertainment, and CNBC reported today that the deal is progressing as planned. The closing has been pushed out to June, rather than the original April, but both companies insist the merger will happen. They were even quoted saying that the companies have the liquidity to last for over a year if the deal gets pushed out again. 

In another deal, Penn National agreed to sell the real estate assets of the Tropicana in Las Vegas to Gaming & Leisure Properties (NASDAQ:GLPI) in exchange for $337.5 million in rent credits. This will cover rent for about five months, giving the company a key cash savings tool while resorts are shut down due to COVID-19. 

The general takeaway from both of these announcements is that deals aren't slowing down even though resorts are closed for the time being. 

Now what

For Caesars and Eldorado, the momentum to get a deal done seems to be too big to overcome. There may be some ups and downs on the horizon, but the two companies haven't seen enough of a change in the long-term vision of their businesses to call off a $17.3 billion merger. 

What I think is more telling is the Penn National deal. Now that REITs own most of the real estate that casino companies operate on, there will be an incentive for the two parties to find a way to keep properties solvent without hurting the REIT's balance sheet too badly. Free rent in exchange for another asset is a great option for those with the ability to do it. 

There will likely be a move by many casino companies in the next few weeks to shore up their balance sheets in one way or another. Some may sell stock, some may take on new debt, and selling assets could even be attractive. But the COVID-19 shutdown that the industry is going through will leave a hole in every company's balance sheet, so it's good for investors to know that capital markets are still open to these companies, for now.

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