Stock Spinoffs

Ceasars Revving Up The Growth Engine

Spin Doctor
Ceasars Entertainment (CZR) is certainly getting creative in order to deal with its massive debt pile. As this piece notes, the company has already refinanced some debt, pushed back maturities and even attempted to redefine its leverage ratios. Unfortunately, that hasn’t been enough ‘relief’, so the company’s announced a new plan to issue subscription rights to shareholders. The rights would be distributed on a 1:1 basis and offer shareholders the option to purchase a stake in a newly created entity named Ceasars Growth Partners. The new company will own Ceasars Interactive Entertainment, Las Vegas’ Planet Hollywood Resort & Casino, Ceasar’s JV in the Horseshoe Baltimore and a stake in the management fee stream from both properties. Oh yeah, the parent will also ‘contribute’ ~$1.1b of senior notes. CZR’s financial sponsors, TPG & Apollo (APO), have indicated that they will contribute up to $250m each into the new venture. According to CEO Gary Loveman, the move ‘will benefit the company in many ways, including the creation of a more flexible vehicle to fund growth projects.’  While this provides the basic flavoring of the spin, the actual structuring of the transaction is a bit more complicated and you can read more about in the press release linked to above or in the most recent quarter’s conference call transcript.

In order to fully appreciate the rationale behind this move, it is important to take a look at the company’s recent history. Caesars was formerly known as Harrah’s Entertainment and taken private by The Apollo Group and TPG in a mega-LBO announced back in late 2006. Not such a great time to pile on the debt though as the Great Recession shortly hit which led to tight credit markets and dried up gambling revenues. While other gambling companies were able to rely on a boom in Macau gambling, Ceasars was shut out of the area. Ever since the LBO, the company has been trying to successfully manage its debt load and in addition to the measures mentioned above, the company attempted an IPO back in 2010 which failed. It succeeded in a more limited IPO a year later allowing some equity holders to exit, but only a small fraction, ~1%, of its shares were offered. Needless to say, the name has been quite volatile and it’s worth checking out this Barron’s writeup on the IPO shortly after the transaction.

If all of the subscription rights were to be exercised then the company would raise ~$1.2b and end up owning somewhere between 57-77% of the new company’s economic interest. Overall, this seems like an attempt to shelter ‘good assets’ from ‘bad assets’ and it’s likely many investors will be more interested in the new company as CZR’s balance sheet is really about as ugly as they come. Sometimes the downtrodden, over-leveraged company ends up becoming the darling in these transactions…but you better make sure you do your work here as it looks like there is a good chance of bankruptcy here.

The timeline for this transaction is still up in the air and management would not provide any estimate when asked about it during the conference call. We will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned and has awful luck when gambling at Ceasars properties.

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