Description

Long Caesars Entertainment January 2026, $60 strike calls (~$6): 

IV 44

Delta .45

690 days until expiration

Situation Overview:

CZR has been a perpetual special situation / event-driven stock and credit for ~20 years now. Go-privates. Restructurings. Emerging from bankruptcy. Shareholder activism. Transformational mergers. Large disposals. Management mishaps. New business lines. All of these events have been trading events, but none of them have led to a sustainable trend in the stock higher.

Why now? and Why do we have this opportunity?

First off, I am a fan of Reeg. I think he is an excellent executive. But the reality is, the plan to ramp digital and the amount of capital spent to get the business to it's current form is a self-inflicted wound that has taken a long time to recover from...

As you can see, CZR has underperformed just about everything since Reeg first presented his digital spend strategy. Obviously, macro has played a role in some of this as well, and the balance sheet leverage has been a material headwind...but this is all about to change. I think when we look back exiting 2025-26, 2024 will have been the inflection point...

...and the inflection point all begins, with a key upcoming disposal catalyst sometime in the next 6 months, that should remove a major overhang on the shares, allowing the company to aggressively reduce their shares outstanding and likely create a shareholder transformation. 

Event / Event timing:

Likely before the end of this year, and more likely in the next few months, Caesars's will monetize their ownership stake in Centaur.

https://www.businesswire.com/news/home/20190624005280/en/VICI-Properties-Inc.-Enters-Transformative-Partnership-With-Eldorado-Resorts-Related-to-the-Proposed-Combination-With-Caesars-Entertainment 

https://www.sec.gov/Archives/edgar/data/1590895/000119312520196232/d940333dex1015.htm

Key language:

VICI Properties and Eldorado will enter into a put-call agreement, whereby the Company has a call right to acquire, and Eldorado has a put right to require that the Company acquire, the land and real estate assets associated with Harrah’s Hoosier Park and Indiana Grand (together, the “Centaur Assets”). The purchase price related to the put option from Eldorado would be an 8.0% capitalization rate (or 12.5x the initial annual rent). The purchase price related to the call option would be a 7.7% capitalization rate (or 13.0x the initial annual rent). The initial annual rent for the Centaur Assets would be the amount that causes the ratio of EBITDAR of the property to the initial property lease rent to equal 1.3x. The put-call agreement may be exercised by either party between January 1, 2022 and December 31, 2024.

This transaction value should be $2.1-$2.5bn.

This entry catalyst really all comes down to timing to turn on the financial engineering buyback machine, so here is how I think about mapping this out.

CZR and VICI will likely exercise the put/call. My sense is by looking at how long precedent transactions take to close, the latest this transaction can be announced is August 15th (perhaps as late as October 15th re short regulatory timeline), but more likely due to where these assets are based, the regulatory approval process may be a touch longer so I think the window is mid-June to announce a transaction, with no reason why it can't be announced sooner. 

If you look at various precedents ranging from Bally's Tropicana (7.5 months), PENN / Pinnacle took 10 months (won't be anywhere this long from announcement to close), VICI / Century Casino's took 4 months, VICI / Gold Strike took 4 months, VICI / JACK Cleveland took 3 months, and VICI / Cinncinatti took 5 months. 

VICI corporate action pattern recognition:

VICI has a history of issuing equity and does so through a deep bench of capital markets desks including Morgan Stanley, DB, Barclays, and BofA. They have at times utilized smaller shops like Union Gaming. Currently, none of them are restricted on the stock. 

VICI tends to issue equity alongside deals in early March, mid June, and right after labor day and in early November. Because VICI/CZR will likely want to leave adequate time to secure outstanding regulatory approvals, I don't believe the parties will announce a transaction in Q4 unless they believe its a streamlined process. My sense is this is pretty cut and dry but still requires license approvals, etc. The last VICI equity offering shelf was filed February 28th, 2023 for $1.5bn. VICI also executed a ~30mn share ATM forward sale in 2023 for $950mn of proceeds. In January 2024, VICI's ATM sold another $305mn and still has room to sell another $700mn. VICI also has $2.3bn in RCL capacity. Net/Net, financing should not be an issue, and they know the assets very well. 

Recent VICI Commentary doesn't give us much, but it's clearly top of mind:

Trade Structure:

There is already an excellent write up on VIC that does a solid job of highlighting the value of CZR and the potential upside and I happen to agree with the author's assessment of the business, general modeling assumptions, direction of fundamentals so I am not going to provide a deep dive into valuation other than to say, I think CZR will likely re-rate to mid 50s after the announcement, and will not be a sell-the-news exit event. After the closing of the transaction, a few months later, the shares should begin a new path higher with the announcement/guidance regarding buyback capacity to get the shareholder transition underway.

Anyway, I am focused on how to monetize the entire event path, and the removal of a major overhang, deleveraging the balance sheet and setting up the company to be a pallatable investment opportunity, perhaps for the first time in the last 20 years! 

The January 2026 $60 strike call option is currently trading for $6 per contract (the option owner participates in the upside of the stock above $66 per share). Based on deleveraging (every turn of leverage is ~20 per share using EBITDA and $8 per share using FCF with Digital exiting 24' EBITDA of $300mn, but I can see it coming in a bit higher...$315mn), and the inflection in the j-curve of the Caesars digital business, I believe exiting 2025, conservatively, CZR will have purchased ~15mn shares back at an average price of ~70 per share or nearly $1bn (super conservative assumption). In addition, I believe CAPEX assumptions entering 2026 will be running off materially, allowing the company to increase their share repurchase materially. Reeg and team will likely 'fix leverage' ala, John Malone at 2.5x-3.0x, while generating ~1.85-$2.2bn in free cash flow (my soft recession case is $1.25bn with regionals under stress). I think it is unlikely the c-suite makes any large scale acquisitions, but opportunistic tuck-in's are more likely to support Digital. I am also not including any future strip disposals of Flamingo and/or Planet Hollywood, that could resurface.

Capex rolling off via JP Morgan:

The current r/r of the common stock is highly attractive (mid 30s / par, before material capital returns), but with deleveraging flowing directly to the equity, I like owning a security with the most torque, but also adequate time for the event path and fundamental inflection to not only come to fruition, but for the investment community to take notice.

In the low probability event, the Centaur transaction doesn't come to fruition in 2024, and macro conditions soften from here, I believe CZR shares may continue to languish due to its optically high leverage profile, and the common stock could continue to bleed vs the January 2026, $60 strike call will likely lose material value under that scenario, the 'run the table' scenario, $6/contract in value could return multiples. At par, these calls are worth $34 per contract. At $150 per share these call options are worth $84 per contract.

I am not a fan of utilizing sum of the parts analysis, but I think a lot of the sell-side community have become almost anchored to it, because the FCF yield to equity is just so high...the trend in multiples used is the reverse hockey stick and down and to the right. I use a very low multiple for regionals, but I think there is a lot of room for multiple expansion in Digital from street range of 11-14x and also elasticity in the multiple for Vegas from 8-10x range. 

Summary:

Over the next few months, CZR stock will have a material deleveraging overhang removed, allowing the company to begin it's capital return journey and catalyze the stock. I believe the company will aggressively repurchase shares via ASR and then likely institute a rolling 18 month authorization to repurchase $1.25-1.5bn and even evaluate a dividend distribution and opportunistically evaluate acquisitions, but unlikely to do anything transformational. 

Catalyst

Torque:

Balance sheet positioned for large capital returns - Centaur removes leverage overhang, which will allow CZR to turn on a share repurchase authorization

Earnings revisions up in Vegas (offset potential weakness in Regionals)

Digital revisions higher result in higher CZR operating leverage and potential for a higher multiple over time

Capex run-off leads to higher free cash flow generation

Optionality on CZR turning into a cyclical compounder / higher volatility secular story exiting 2025-26

Shareholder base transformation