Hookup Alert - Caesars Entertainment (CZR) + El Dorado Resorts (ERI)

If at first you don't succeed (first you don't succeed),
Dust yourself off, and try again
You can dust it off and try again, try again

Artist: Aaliyah

Song: Try Again

Rest in Peace to the Great Aaliyah. Gone to soon but your music lives on in our hearts.  So I gave you a story about another one of my good friend’s Tilman Fertitta, who is the owner of the Houston Rockets, The Golden Nugget, and Landry’s Restaurant chains, etc. I saw him on TV the other day still sounding a little cautious, however; with things re-opening I’m sure his worst case fears are dissipating. See here for my risk breakdown of how Tilman danced with debt and got very lucky: https://urbanomics.blogspot.com/2020/03/a-house-of-cards-pt-2-debt-gift-curse.html

Cue the music: a billi a billi --- he’s an old money billionaire, so there's a few things to learn. Thanks Lil Wayne I’ll take it from here. I wanted to highlight a trade my buddy Tilman brought to my attention a little less than two years ago. It’s no secret I like diamonds in the rough and Caesars Entertainment (yeah home to Caesars Palace in Las Vegas) was one of those gems I started looking at a few years ago. An iconic venue in Las Vegas, Caesars (CZR) is known worldwide and I’ve partied many a times there myself. But Caesars  over the years had taken on a lot of debt and hadn’t really done much.  So when Tilman and his Golden Nugget company made a play for Caesars I decided then was the time to strike.  This is a quick lesson for those just starting out in investing. Look for investments within your life that give you OPTIONALITY. Does it have a good MOAT --  that wide body of water surrounding castles like in Game of Thrones were there for a reason…to keep would be attackers at bay. Caesars brand is like that MOAT -- an iconic branded designed to keep people coming back to their properties. While I like good management, I like the right price even more. I followed CZR as it dropped into the $5-7 dollar range back in 2018 and apparently I wasn’t the only one watching. Pretty soon my boy Tilman and his Golden Nugget company were trying to slide into CZR’s DM. The stock shot up and I decided to pick some shares up as I was a little bit late to the party but believed it had more room to run up. After eight months of Golden Nugget trying to hook up, CZR ghosted on them.

My next lesson is stay clear headed. I got nervous and sold my position which ended in a loss. I should have stayed the course but I took the loss. Likely a result of listening to NOISE --- like being inundated with posts on Facebook and one of the reasons I don’t logon to the platform much. If you listen to NOISE you tend to move with the herd…and I am no sheep. I prefer going against the grain. Sheep will tell you to be patient for change when you clearly see systemic issues right in front of your eyes. I’m not having any of that.

But I am human; I panicked and sold my position for a loss. See below, the “L” I took back in 2018:

The nice thing about investing is it’s just you and a market of 10K+ stocks. If you’re right, you had the guts to make the call. If you’re wrong…it’s on you. All people want in life is a fair shot…the game not to be rigged…the knee taken off of our necks.  My "I told you so moment" was just 3 months later when rumor had it Caesars was now flirting with Eldorado Resorts (ERI).  Not happy about the “L” I took just a few months ago I felt a bit vindicated in CZR as an investment. I jumped back in as the two confirmed they were hooking up. My position was in the GREEN and I was on to the next trade. My 2019 positions for CZR:

Then COVID-19 happened and I watched the closure of casinos and gathering spaces to halt the spread of the virus. CZR cratered and fell as low as $3.52 on March 18^th. I held strong this time…not following the herd…knowing CZR’s worth (in the stock market we call this intrinsic value). That’s what makes some of us different. I know my worth, which then helps me evaluate the worth of everything in life. CZR intrinsic value is iconic, trust I have the pictures to prove it.

My last lesson - do your own deals…own your own masters. It helps to be good in math but stop giving your dough to someone else if you can’t quantify that value they are bringing to the table. It’s not personal, it’s your independence and I treat it as such.

As you see above, I even opened a new stake in CZR yesterday because I have conviction the deal gets done. I’ve already been sent the follow merger terms to review and on May 12th things became clearer as Eldorado Resorts provided a timeline to close the $17.3 Billion acquisition of CZR that's not too far off. There are approvals pending from the states of Indiana, New Jersey and Nevada and then it will be sent to the Federal Trade Commission. The math is this: ERI is paying Caesars shareholders the sum of $8.40 plus an amount equal to $0.003333 (the “Ticking Fee”) for each day from March 25, 2020 until the closing date of the Merger (the “Closing Date”), multiplied by (ii) a number of shares of Caesars common stock (the “Aggregate Caesars Share Amount”) equal to (A) 682,161,838 plus (B) the number of shares of Caesars common stock issued after June 24, 2019 and prior to the Effective Time pursuant to the exercise of certain equity awards issued under Caesars stock plans or conversion of Caesars’ outstanding convertible notes (the “Aggregate Cash Amount”). Subject to the proration procedures set forth in the Merger Agreement.

The Truth is all that legal language above don’t mean much. Keep Life Simple, Treat People Fair:

At $8.40 a share in cash plus shares in the new company, I break it down like this:

-             If you bought below $8.40 à You’re getting all your cash back, some profits, and shares in a New Company ERI ( a free roll as my       gamblers call it)

-           If you bought above $8.40 below $10 à I’m no gambler but any returns on your investment 80% and above is close to a playing with the house’s money. If you add in the free shares you’re receiving in the new company that = getting Optionality (most of my money back to move on to new investment plus free shares in a new company

I started this blog many years ago because I’ve witnessed system racism all my life. Early on I knew I needed an exit plan because Corporate America wasn’t thinking about diversifying its ranks. No mentors, I was one of the fastest rising African American’s to make the senior management ranks because I worked harder and longer than most. I could probably count the number of African American director’s at my company (which is the next level) on 2 hands in a company that boasts over 15K people so I knew that glass ceiling was real. I look forward to change but until these institutions are dismantled you’ll see me here diversifying myself for those moments when someone brings terms to me that aren’t equitable for me or my family…I always have the OPTIONALITY to say no. Sadly there is no strategy for racism, bad policing, and hate. I only know to do what my late African father taught me to do. Know My History, Know Where I’ve Come From, Treat Others with Respect, and to be the King I was meant to be…all while still not taking shit from anyone. I put love out into the world and expect it back. That’s all I ask for. 

Peace and Love ✌

Full Disclosure: I am long CZR option contracts. Fancy BS for I think the stock will go up

A House of Cards --- Pt. 3 (Debt - The Gift & The Curse)

This has probably been my toughest post to write.  I've been hinting at what is to come through posts like Deja Vu. I believe the economic impact to come will be very rough on all of us and it is the primary reason I headed to the sidelines (moved most of my individual retirement accounts to cash) over a month ago. It's the reason why I have been holding so much in savings and declining to take on any real estate and other deals for the last few years.  It was also the reason why in my Investment Account I stop investing in roughly Q1 of 2017 and began trading options --- short term bets I wanted to win quickly and then get out off. I did well but I still have some bets on the books that have been pummeled and probably overexposed myself to retail and consumer discretionary stocks.  I have invoked my sandlot strategy (taking my ball and leaving the playground) and this has only happened one other time in my Gen X/Millennial lifetime (I'm on the border --- take your pick). You'll see the other time was during the financial crisis. Instead of me speaking on what is to come, I've decided to rip from the headlines snippets of what the everyday people feel and believe are their biggest risks to come. Almost all involve too much debt and that's why I rally around a lyric in an old Kanye verse from the Beyonce Ego (remix): "What you want dog, Tryna stay recession free".  Yes sir, to stay recession free is to stay debt free. See the risks of limited savings, too much debt (over-leverage), and not having enough capital to make investments when others are swimming naked. 

----------------DEBT - THE CURSE--------------------------------------------------------------------

The Human Toll --- No Free Lunch

(The Washington Post) -- In interviews with more than a dozen laid off workers and small business owners, nearly all said their biggest economic concern was paying the rent or mortgage in April. Many people across the country have monthly payments that exceed $1,000. The median monthly rent in the nation is just over $1,600, according to Zillow, an online real estate database company. The median mortgage payment is $1,400. Millions of Americans don’t know how they will get the money in time to make rent. The nation has 40 million renters, who tend to be younger. Black and Hispanic families are twice as likely to rent as white households, according to the Pew Research Center. (Bloomberg) -- “If the government tells me you’re good enough to get a loan, I have to trust and believe in the government,” Castillo said. “Then we just hope and pray that the client doesn’t get foreclosed on.” Matt Badders, a San Antonio lawyer who represents lenders, auctioned off two houses. The failed mortgages remind him of the run-up to the financial crisis 12 years ago, when lending to customers with spotty credit nearly brought down the world’s financial system. “We’re almost back to 2007, when mortgage originators are waking people up on park benches, saying sign here,” Badders said. After the last financial crisis, the fund required a $1.7 billion taxpayer bailout, its first in 80 years. The government has since tightened lending standards and built up the insurance fund. Because of rising home prices, borrowers who bought years ago now have considerable home equity, which could provide some cushion as well. But recent loans are the most likely to fail. In San Antonio, Erika Wilson, a 32-year-old home health aide who was separated from her husband, bought her dream house in June 2018. It had an eat-in kitchen and more than enough room for her two young daughters. Along with her other debt, the $1,900-a-month mortgage payments ate up more than half her family’s income. On Q Financial, an Arizona-based lender, foreclosed on her loan.  She’s still living there because the federal government has suspended eviction proceedings in its lending programs during the pandemic. “I messed it up,” Wilson said.  “I didn’t know what I was doing. It made me feel like I wasn’t adult enough to own a home.”  (The Atlantic) -- According to Zandi, at least three big waves will hit American economy activity. The first is occurring now, as businesses close and the economy grinds to a halt.  Next will be the job losses. “The third wave will hit when people realize they are worth so much less, particularly the Boomers, who are focused on their retirement,” Zandi told me. “When they realize their nest egg has evaporated, they'll go into panic mode and cut back on spending, and that further exacerbates the problem.”  The Small-Business Impact of an Over Levered System (Barron’s) -- The Federal Housing Finance Agency on Monday said that Fannie Mae and Freddie Mac would offer mortgage forbearance to some multifamily property owners—on the condition that they suspend evictions on the basis of nonpayment of rent. According to the plans Freddie Mac and Fannie Mae announced Tuesday morning, landlords whose multifamily properties are financed through the enterprises may be eligible to defer loan payments for up to three months. Landlords who want to take advantage must show hardship as a consequence of the virus and gain lender approval, according to the companies’ press releases. (Bloomberg) -- Real estate investor Tom Barrack said the U.S. commercial-mortgage market is on the brink of collapse and predicted a “domino effect” of catastrophic economic consequences if banks and government don’t take prompt action to keep borrowers from defaulting. Barrack, chairman and chief executive officer of Colony Capital Inc., warned in a white paper and in a subsequent interview on Bloomberg Television of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the coronavirus pandemic and consequent shutdown of much of the U.S. economy. “To keep people employed, you have to support the employers,” he said Monday in the interview. “The biggest part of employer expense is rent. When commerce stops and they can’t pay rent and they can’t pay interest on the debt, and then the banks and the intermediaries can’t pay their investors, it all collapses.”  Urb Lesson of the Day:  Financial Account Diversification ·         Savings Accounts – Gets you through the rough patches in life ·         Investment Accounts – Allows you to take risks when others are NOT – like today ·       Individual Retirement Accounts – This is truly for your future, why NOT wait for a sign that the recovery is strong

A House of Cards --- Pt. 2 (Debt - The Gift & The Curse)

First, I wanted to apologize to a reader. When I was asked in my last post whether I thought the system is built like a house of cards --- I said I wouldn't use those words. But in fact, I actually did  just that during the financial crisis of 2009. See here: A House of Cards Pt. 1  🎴

Sorry Bill Maher, it was my very rare attempt at trying to be politically correct but I got caught so I thank the readers for keeping me honest. I recently spent some time reading my own posts from late 2007 into 2010 to remind myself of what we lived through in the last crisis. There were the market highs I wrote about in 2007 which were peppered with my incessant rants about the housing market being eerily over inflated. My saving grace was the Lord blessing me ☝ with an opportunity to be in town while my sister was house hunting for her first home. While I applauded her for getting a newly built home for a great price, I kept giving her grief for moving to the boondocks --- yep right across from cornfields. I soon began my path to homeownership and then stopped. My sister made more money than I did but somehow I was pre-approved for a loan almost double her amount. It didn't add up so I told myself back in 2005 something doesn't feel right. But what's the saying if you build it they will come. And of boy did they ever -- the city continued to extend and while some cornfields are still there, I see less and less as the years pass. I guess that's the perfect picture of the America dream, the big home -- but who is going to stop you when you can't afford it. My accounting background saved me I guess.

While I would love to get back to what I'm buying and selling, my goal right now honestly is on educating people about risk. I'm blessed to be able to sit back and write a blog because I have a rainy day fund built to withstand this disease and economic fallout still to come. I de-risked by moving my retirement fund to cash --- because it's purpose is just for that...RETIREMENT. And I'm blessed with a pot of funds I've saved over the years to take risks at a time when many are unfortunately being squeezed. These are pillars that you can implement to ensure you're built to last. And what I hope will stay with you is I did it the old-fashioned way --- I saved day after day reminding myself I grew up po' middle class and I'm not in a HURRY to go back. With 2 cars both going on 15+ years of age means, our cars are paid off (one less bill to fret about). Yes, they are showing their age and one is in the shop but that repair bill is looking better and better that getting a fancy new car in an environment like this. When my wife was my then girlfriend, she would jokingly introduce me as the guy who bought a new home but got his coach off of Craigslist. Yup that was me, but I shop well and it was Macy's higher end furniture and I helped a couple who needed it gone because they had to leave for Australia. But on my financial terms and that coach is sitting in my second home and still complimented to this day. 

When I think about this crisis, I wonder how much pain it will inflict physically from the disease, economically to the country, financially to all of us, but emotionally to most of us who did not or unfortunately cannot save enough to weather the storm to make rent or the mortgage or the car bill or the utilities. It makes me wonder how many lives could have been saved if the country did not need to remain "Open for Business" because of the curse of debt. I stand in awe at stimulus package after package that is thrown at this crisis and think about the gift it will provide to many to reflate the economy. I hurt thinking the richest nation does not have enough equipment to battle the viruses newest target --- the great people of New York, especially New York City. Two people to a respirator was an update I heard today and I was in disbelief --- mainly because I had spent over a month watching Eunice Yoon, a CNBC reporter from China day by day paint a vivid picture of how a bustling nation like China was slowly ground to a halt. Wuhan in lockdown, then further cities like Beijing take stringent precautions. Bleaching of streets and temperature readers shown on TV and then she would narrate about the strict restrictions just to get into her building which included ID and temperature checks. If this was in January and Wall Street and I were digesting this information you would assume we were preparing for what was to come. CNBC is a channel I'm positive many in the White House had turned on just as I did each morning. So hopefully you understand where I was coming firm almost a month ago when I was frantically asking for things to be locked down. My goal is not to ruin the dream, just a reminder than lives were at stake.

-------------------------------------------Debt - A Gift?-------------------------------------------------------------

A quick story of the gift and curse of debt. This a Bloomberg story on my buddy Tilman Feritta. I have a nice stake in Ceasar's which I think Tilman does as well so I wanted to highlight how debt is used to lever up to be a rock star. He is feeling some pain but it's a quick insight into how those more fortunate will not suffer like many others will. My next posts will show you the other side. 

Tilman Fertitta:

• Personal fortune of over $5 billion before the crisis.
• Most of his wealth is in the travel and leisure industry:
• Casinos -- Golden Nugget 🎲
• Restaurants -- The Landry’s Inc. portfolio includes Del Frisco’s steakhouse and Bubba Gump Shrimp 😋
• Sports Franchises - Houston Rockets🏀

Tilman has worked hard but he used an amazing amount of DEBT 💰💰(financial leverage) to amass his empire. How you ask:

• Well, leverage of course. He took an outstanding amount of debt out against all the companies he owned. To the tune of roughly $5 billion against Golden Nugget the parent company for his restaurants and casinos. So there is a big risk he could lose this part of his empire due to the crisis. 

How might this play out for Tilman, maybe coin flip odds in my view:

• Heads -- Confident the company will have access to enough cash to weather the storm
• Tails -- Fertitta said: "This year, his restaurants and casinos were expected to generate well over $700 million of cash, more than enough to pay $250 million to service the debt and invest as much as $200 million in new projects, he said." "That leaves you with around $300 million of free cash flow,” he points out. “I don’t think it’s a bad business model.”  

Heads would definitely require a sizable bailout and the economy being jump started within a few months. Tails if feels like he acknowledges I built the thing on steroids 💪 and if he loses he went out like a true Texas cowboy.

No worries on how this story plays out because the Houston Rockets, his bankroll, and other properties he owns are not tied up in his highly levered businesses. Great risk management Tilman but how many folks on main street will have an outcome with odds like this. 🤔 I hope we all have heads or tails outcomes like this as we learn more about how our economy works.

Source: Bloomberg Davide Scigliuzzo