Icahn brings two directors to Caesars’ board. How the activist may build value

Business: Caesars Entertainment is a diversified gaming and hospitality company which operates through several segments: Las Vegas, Regional, Caesars Digital, and Managed and Branded, in addition to Corporate and Other. Its Las Vegas Segment properties include The Cromwell, Flamingo Las Vegas and The LINQ Hotel & Casino. Its Regional properties include Circus Circus Reno, Grand Victoria Casino and Horseshoe Baltimore. Its Managed and Branded properties include Harrah’s Ak-Chin, Harrah’s Cherokee, and Harrah’s Cherokee Valley River. Its resorts operate primarily under the Caesars, Harrah’s, Horseshoe and Eldorado brand names. It offers diversified gaming, entertainment and hospitality amenities, destinations, and a full suite of mobile and online gaming and sports betting experiences.

Stock Market Value: $5.8B ($27.36 per share)

Ownership: 1.15%

Average Cost: n/a

Activist Commentary: Carl Icahn is the grandfather of shareholder activism and a true pioneer of the strategy. He is very passionate about shareholder rights and good corporate governance and will go to extreme lengths to fight incompetent boards and management teams to protect shareholder value. Icahn has invested across all sectors over his more than six-decade long career, and he has a tremendous history of creating value at casinos. In 1998, Icahn acquired the Stratosphere casino operations, fixed it up, grew it and sold it for more than $1 billion about a decade later. Icahn acquired an interest in Tropicana in 2008 when it was bankrupt, brought in new leadership and restructured it and sold it in April 2018 for $1.85 billion. And of course, he disclosed a stake in Caesars in 2019, replaced departing CEO Mark Frissora and orchestrated the Eldorado merger.

Earlier this month, Carl Icahn and Caesars reached an agreement in which the company consented to expanding the size of the board to 12 directors and appointing Jesse Lynn (general counsel of Icahn Enterprises) and Ted Papapostolou (chief financial officer of Icahn Enterprises) as directors to the company’s board. Icahn agreed to abide by certain customary standstill and voting provisions.

This is not Carl Icahn’s first foray at Caesars. He filed a 13D in February 2019 stating then that he believed the board should conduct a strategic review with a view toward a sale of the company being the optimal path to shareholder value creation. On March 1, 2019, Icahn and Caesars entered into a director appointment and nomination agreement, pursuant to which John Boushy, Matthew Ferko and Christopher Williams resigned from the board and James Nelson, Courtney Mather and Keith Cozza were appointed to fill the resulting vacancies. On July 20, 2020, Caesars merged with Eldorado to form Caesars Entertainment with Icahn’s support. Courtney Mather is still on the board of Caesars but no longer works for Carl Icahn.

Since the merger, Caesars has been attempting to strengthen its balance sheet, pursuing strategic divestments and acquisitions and expanding into the growing digital gaming market along with the rest of the brick-and-mortar gaming industry. Many of these initiatives have been successful and some have been disappointing. On Oct. 1, 2021, Caesars’ stock price topped $119 per share. Now, almost five years later, the stock has dropped back below the price when Icahn merged Caesars with Eldorado in 2020 – in the heart of Covid – despite revenue increasing from $9.6 billion in 2021 to $11.2 billion today and operating income increasing from $1.7 billion to $2.3 billion over those respective periods. Icahn clearly sees a great business at a very attractive price.

Icahn and the company recently entered into an agreement in which Caesar agreed to expand the size of the board to 12 and appoint Jesse Lynn (general counsel of Icahn Enterprises) and Ted Papapostolou (chief financial officer of Icahn Enterprises) to the company’s board. In the press release announcing this agreement, Icahn stated that they, “look forward to working with [management] and the Board to maximize value for all shareholders, including by exploring strategic alternatives for the Company’s underappreciated digital business.”

A spin-off of Caesars Digital makes sense for several reasons. In 2024, Caesars Digital generated $1.16 billion in revenue, accounting for 10.3% of the company’s total revenue. This represented a 19.5% growth from the year prior and 112.2% growth since 2022. Consensus estimates suggest that Digital can continue to grow in mid-double-digits. Digital’s earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) has also surged 207.9% from 2023 to 2024, with projections of another 160.9% increase in 2025. In contrast, the company’s brick-and-mortar segments (Las Vegas and Regional), have remained relatively stagnant, with revenue declining 2.34% from 2023 and 1.78% from 2022. EBITDAR has also declined by 6.56% and 5.87% over the same periods, respectively, and consensus estimates predict a similar trend going forward. Clearly, these are two businesses at vastly different points in their growth cycles, making it difficult for the market to fairly evaluate them as a single entity. Currently Caesars trades at 8.43-times EBITDA, whereas digital peers of Caesars Digital trade at 15 times to 25 times. Applying that multiple range to Digital’s $305 million of 2025E adjusted EBITDA would render an entity with a value of approximately $4.6 billion to $7.6 billion. As Digital only represents 3% of the company’s current EBITDA, this separation would unlock a ton of value, as Digital’s standalone valuation would represent 15% to 25% of the company’s total current enterprise value – significantly higher than what its implied valuation is right now within Caesars. This separation would also allow investors the option to invest in a consistent legacy casino business or a riskier high-growth digital business. This does not have to be a straight sale or spinoff, either. Icahn is one of the most creative investors ever and his two nominees will likely work to figure out what the best structure is for shareholders. For example, the company could retain a piece of the digital business or enter into an agreement with the new entity to run the business.

Carl Icahn knows a ton about the casino business. He has had a tremendous history of creating value at casinos. In 1998, Icahn acquired the Stratosphere casino operations, fixed it up, grew it and sold it for more than $1 billion about a decade later. Icahn acquired an interest in Tropicana in 2008 when it was bankrupt, brought in new leadership and restructured it and sold it in April 2018 for $1.85 billion. And of course, he disclosed a stake in Caesars in 2019, replaced departing CEO Mark Frissora and orchestrated the Eldorado merger. So, there is no other activist more qualified to create value at a company like Caesars. The stealth nature and structure of the agreement in addition to the comments made by Caesars and Icahn strongly indicate that this is a very amicable arrangement, and that Icahn is confident in management’s ability. While CEOs do not generally like to spin off assets, all indications are that Caesars’ management is receptive to this strategy.

Icahn is not a micro-manager and trusts his people and management to execute effectively. This has been an area rife for activism with Icahn protege Keith Meister on the board of MGM, two activists in Penn Entertainment and two more activists in Entain with Eminence founder Ricky Sandler on the board. This industry is at an inflection point with the onset of interactive gaming. The companies that navigate this better – likely through acquisitions and alliances, and without significantly weakening their balance sheets – will be the winners. I am not sure you can have a better ally in that type of initiative than Carl Icahn.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.