Interest Rates Weighing on Gaming Industry M&A

As the year commenced, expectations were high that the Federal Reserve might reduce interest rates from their peak levels in two decades, potentially igniting a flurry of mergers and acquisitions within the casino gaming sector. Unfortunately, this anticipated development has yet to occur.

Commercial Gaming Casino Revenue

The Las Vegas Strip. Elevated interest rates continue to impede mergers and acquisitions in the gaming industry, an analyst reports. (Image: Las Vegas Sun)  

Early in 2024, following persistent high figures in the Consumer Price Index (CPI), hopes that the Fed might enact rate cuts between three to six times have nearly vanished. Now, some industry watchers speculate that the central bank may not lower borrowing rates until the following year. This stagnation is likely to hinder the consolidation of the gaming industry, as noted by Truist Securities analyst Barry Jonas.

A decrease in interest rates could potentially stimulate further mergers and acquisitions, along with increased sale leaseback transactions deals where casino operators capitalize on their real estate while retaining operational control over the venues.

According to Jonas, "This hypothesis is likely postponed as the Fed addresses relentless inflation," in his latest client report.

So far this year, some merging activities have taken place within the gaming sector, notably the $6.2 billion merger of International Game Technology’s (NYSE: IGT) global gaming and PlayDigital divisions with Everi (NYSE: EVRI), marking one of the largest transactions thus far. Nevertheless, there has been little activity in terms of casino operators merging or trading individual properties.

Value Appeal in Numerous Gaming Stocks 

The persistent inflation driving up interest rates has encouraged gaming firms to minimize and refinance their debts a strategy receiving praise from analysts and investors. However, these measures are negatively impacting stock prices.

From casino stocks and gaming device manufacturers to real estate investment trusts (REITs) that own gaming properties, these shares are generally underperforming compared to the broader market this year. Moreover, the dwindling expectations for rate cuts are removing a crucial stimulant for these stocks.

"However, without M&A and predictable organic growth, many of our stocks remain entrenched in a state of undervaluation," Jonas further stated.

On a recent Tuesday, the analyst revised downward the price targets for four gaming stocks, including Caesars Entertainment (NASDAQ: CZR), although he did increase his price estimates for Bally’s (NYSE: BALY) and Red Rock Resorts (NASDAQ: RRR).

Prolonged Impact on Gaming REITs

Real estate ranks among the sectors most sensitive to interest rates a reality underscored by the S&P Real Estate Select Sector Index, which has declined by 8.3% since the beginning of the year, while the S&P 500 has climbed 6.7%.

The expectation that interest rates will remain high in the near term is adversely affecting shares of casino property owners. Gaming and Leisure Properties (NASDAQ: GLPI) has dropped 12% year to date, and VICI Properties (NYSE: VICI), the owner of Caesars Palace, has fallen by 10.82%.

Jonas indicates that the current market conditions may not support major transactions by gaming REITs. However, this could shift if interest rates stabilize and more clarity arises regarding when the Fed might reduce borrowing costs.