Caesars Back in the Game
Regulators in Missouri and Louisiana have signed off on the court-supervised restructuring of Caesars Entertainment Operating Company, the stage is set for the return of the Caesars conglomerate as a leading force in gaming.
The approvals―the last that Las Vegas-based parent Caesars Entertainment needed from the states where CEOC, its largest subsidiary, operates―enabled the company to target October 6 for CEOC’s exit from U.S. Bankruptcy Court protection.
The announcement came with a statement from Caesars promising a “stronger company” ready to embark on a nationwide strategy of “growth and investment.”
“The conclusion of CEOC’s restructuring leaves Caesars Entertainment with an expected enterprise value of approximately $20 billion based on yesterday’s closing prices. With reduced leverage, increased free cash flow and the new REIT structure, we are positioned with a solid foundation to pursue a diversified growth strategy,” said Mark Frissora, president and chief executive officer of Caesars Entertainment. “Throughout the restructuring process, Caesars has invested significantly to upgrade and renovate its facilities. Total capex from 2015-2017 is expected to exceed $1.5 billion, which will benefit the company going forward. We are also executing hundreds of initiatives to generate incremental revenue, as well as to enhance operational efficiency, guest experiences and employee engagement through technology-driven innovation and process improvement.”
That view got a hearty endorsement from Wall Street in the form of a successful placement by Caesars of $1.7 billion in junk bonds at 5.25 percent to help fund the restructuring―well under the 5.4 percent average yield for similarly rated bonds, according to Bank of America Merrill Lynch data.
Caesars cited five points it will pursue now that bankruptcy is behind it.
• Leveraging Significant Presence in Growing Las Vegas – Caesars Entertainment will continue to update its room product in Las Vegas in line with its positive long-term outlook for this market. In addition, the Company is advancing the development of a convention center and other opportunities to monetize large, underutilized commercial scale properties adjacent to the Las Vegas strip in its real estate portfolio.
• Pursuing Network Expansion Opportunities – Caesars Entertainment anticipates unlocking new opportunities for organic and inorganic growth across global markets supported by a strong free cash flow profile following CEOC’s emergence from bankruptcy.
• Building on Proven Management Execution – Caesars Entertainment is primed to further improve its financial and operating performance with hundreds of discrete projects under the Company’s Office of Continuous Improvement and through the deployment of new best-in-class, secure, cloud-based enterprise-wide technology solutions.
• Enhancing the Strongest Loyalty Program in the Gaming Industry – With more than 50 million Total Rewards members, Caesars Entertainment is driving revenue growth through technology enhancements in its marketing and engagement channels, such as the application of machine learning to customer behavioral data.
• Taking Advantage of New Capital Structure – With approximately $2 billion in cash, and growing cash flow, Caesars Entertainment is well positioned to invest in future growth.
Most analysts expect investors to come return.
“In a hot market, memories become short and all past sins are forgiven,” Mike Terwilliger, a portfolio manager at Resource America, told International Financing Review.
It’s a herald of what analysts and industry observers see as a new era for the casino giant, and Caesars doubled down on it with the appointment of a new 11-member board of directors chaired by James Hunt, who joins the company from Walt Disney Parks and Resorts Worldwide, where he served as executive vice president and CFO.
What’s significant about the pricing of the bonds, say analysts and investors, is that it points to a belief in the essential strength of Caesars’ far-flung operations―47 casinos owned or managed in 13 states and five international jurisdictions.
Rather what hobbled the company, they say, was the 2008 leveraged buyout engineered by private equity giants Apollo Global Management and TPG Capital that saddled Harrah’s Entertainment, as the company was then known, with $28 billion of debt right at the onset of the Great Recession.
As one leveraged finance banker explained to IFR, “The issue with Caesars was always the capital structure, not the business.”
In the years that followed, with interest payments gobbling up earnings that might have gone into reinvestment and expansion, management began maneuvering the company’s best-performing assets into new, healthy subsidiaries to shield them from the trip to Chapter 11 that appeared increasingly inevitable. CEOC’s creditors, who were left holding the bulk of the debt, some $18 billion, were infuriated, they sued, and the rancor spilled over into Bankruptcy Court when CEOC failed to make a December 2014 interest payment and, as long expected, filed for Chapter 11 protection in January 2015.
Within six months, Chairman and CEO Gary Loveman, who had overseen the Apollo-TPG buyout and the subsequent asset shifts, was removed from operational control of the company. Frissora, the chief executive of Hertz, took over and 18 months of contentious negotiations ensued that finally were resolved with Caesars’ decision to sell its lucrative online business and package the cash as compensation for CEOC’s lenders.
A restructuring of both CEOC and parent Caesars Entertainment was devised and approved by a U.S. Bankruptcy judge in Illinois in January of this year. It will see Apollo and TPG reduced to minority shareholders in a publicly traded real estate investment trust that will own CEOC’s casinos and lease them to a separately listed operating company. Lenders will own a majority share of both entities through a combination of cash and stock equivalent to $10 billion of CEOC’s debt load. They also will control a reconfigured Caesars that will merge with Caesars Acquisition Company, giving them a lucrative stake in one of the strongest of the subsidiaries.