Inflation, Interest Rates Weighing on Gaming Industry M&A, Says Analyst

Entering this year, it was widely expected that the Federal Reserve would pare interest rates from 20-year highs, potentially unleashing a wave of mergers and acquisitions activity in the casino gaming industry, but that scenario hasn’t materialized.

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The Las Vegas Strip. High interest rates are weighing on gaming industry mergers and acquisitions activity, says an analyst. (Image: Las Vegas Sun)

Following a string of stubbornly high readings of the Consumer Price Index (CPI) to start 2024, expectations that the Fed could lower rates anywhere from three to six times this year are all but erased and some market observers are speculating it’s possible the central bank won’t reduce borrowing costs until next year. That could be a drag on gaming industry consolidation, according to Truist Securities analyst Barry Jonas.

Lower interest could be a catalyst for increased mergers and acquisitions and more sale-leaseback activity — transactions in which casino operators monetize real estate holdings while maintaining operational control of the venues.

This thesis is likely delayed while the Fed attempts to combat stubborn inflation,” wrote Jonas in a new report to clients.

Year-to-date, there has been some consolidation in the gaming industry with the $6.2 billion combination of International Game Technology’s (NYSE: IGT) global gaming and PlayDigital units with Everi (NYSE: EVRI) ranking as one of the largest deals to date. However, there’s been nothing of note in terms of casino operator marriages or those companies buying and selling individual properties.

Lots of Gaming Stocks Have Value Appeal

While the higher interest rates caused by persistent inflation have prompted gaming companies to reduce and refinance debt — moves applauded by analysts and investors — those scenarios are weighing on share prices.

Whether it is casino equities, shares of gaming device makers, or real estate investment trusts (REITs) that own gaming properties, those stocks in aggregate are lagging the broader market this year. Additionally, dwindling rate cut expectations are sapping a needed catalyst from the group.

“But absent M&A and predictable organic growth, many of our names are stuck in value land,” added Jonas.

On Tuesday, the analyst lowered price targets on four gaming stocks, including Caesars Entertainment (NASDAQ: CZR), but he did boost price forecasts on Bally’s (NYSE: BALY) and Red Rock Resorts (NASDAQ: RRR).

Higher for Longer Drag on Gaming REITs

Real estate is one of the most interest-rate sensitive sectors — a fact proven by a year-to-date decline of 8.3% by the S&P Real Estate Select Sector Index. Conversely, the S&P 500 is up 6.7% since the start of the year.

Expectations that “higher for longer” is the Fed’s near-term operating procedure is plaguing shares of casino landlords. Gaming and Leisure Properties (NASDAQ: GLPI) is off 12% year-to-date while Caesars Palace owner VICI Properties (NYSE: VICI) is off 10.82%.

Jonas noted that the current environment might not be conducive to gaming REITs executing large-scale transactions, but that scenario could change if interest rates stabilize and clarity emerges as to when the Fed will cut borrowing costs.

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