Caesars Entertainment Corporation Sells Four Casinos to Its Subsidiary
To help relieve its long term debt, Caesars Entertainment Corporation sold four of its casinos to a subsidiary, Caesars Growth Partners, in exchange for $2.2 billion in cash. The four casinos which were sold in early March are three Las Vegas Strip casinos–Bally’s Las Vegas, The Cromwell, and the Quad–and Harrah’s New Orleans Casino.
Financial analysts continue to be concerned about the long term debt situation of the Caesars Entertainment Corporation, which involves $23 billion in total debt. Andrew Zarnett, a specialist in high-yield securities for Deutsche Bank, suggests the gaming company needs to focus on paying the set to come due in 2015 and 2016, which amounts to $3.06 billion.
Despite his belief such a focus is the wise budgetary decision, Zarnett doubts that will be the result of the recent transaction. When Caesars sold Harrah’s St. Louis to Penn National Gaming for $600 million in 2012, its executives chose to reinvest that money into company assets, instead of using it to pay off standing debts.
Debt Concerns Financial Analysts
In 2008, Caesars took the company private, but this saddled the gaming operation with debt, due to a $30.7 buyout of investors. Since that time, Wall Street analysts have not been upbeat about the company’s long term prospects.
Alex Bumazhny, a gaming analyst for Fitch Ratings Service, says the latest transaction does not have him upbeat. Bumazhny said the transaction “reflects another step toward moving assets away from the weaker Caesars Entertainment into healthier entities.”
Analysts like Bumazhny therefore believe Caesars Entertainment is moving assets like the interactive business and land-based properties away from the parent company, which would protect these assets during any potential bankruptcy restructuring process.
Gary Loveman Optimistic
Because the loss of the four casinos further limits the parent company’s “free cash flow profile”, this makes its prospects of recovery appear less likely. Still, Caesars Entertainment CEO Gary Loveman says his company has no plans to file a Chapter 11 bankruptcy reorganization.
In fact, Loveman states the company has taken several steps in the past year which gives it $2 billion on the balance sheet. He also mentions that the most significant debt maturities won’t come due until 2018. By that time, he believes “growth” will allow the corporation to avoid financial trouble. Investing is therefore an alternate way to deal with the debt situation.
While having a conference call to discuss the sell of the four casinos, Loveman said, “We’re much better structured. There is nothing that would trigger a liquidity crisis. We don’t have anything like that.”
For now, the company is concerned about near-term maturities. With the $1.8 billion netted from last week’s transaction, they should be able to focus on paying some of the near-term debts.
Caesars Growth Partners
Caesars Growth Partners was founded in 2013 as an attempt to help repair Caesars Entertainment’s balance sheet. Mitch Garber is the CEO of Caesars Growth Partners and Caesars Interactive Entertainment. Besides its online gaming business and the four casinos it purchased in March 2014, CGP also owns the Horseshoe Baltimore (still under construction), the Octavius Tower at Caesars Palace, and the Planet Hollywood Resort. Management at the recently acquired assets will not change. Operating services are set to be provided using a shared-services joint venture.
Caesars Growth Partners has a number of big name private equity owners in the 42% of the subsidiary not owned by Caesars Entertainment. These private equity owners include Soros Fund Management and George Soros (6 million shares), hedge fund billionaire John Paulson (12 million shares), TPG ($500 million), and Apollo Management Group ($500 million). Despite the major investors, the subsidiary may not be a long term operation. The parent company has the option to buy back outstanding shares in 3 years time.
Financial Outlook
With all the speculation, it’s hard to know what the future financial outlook for Caesars Entertainment Corporation will be. The company may be facing several debt crunches in the next few years, but since it is not a publicly traded company, Caesars can operate in ways they would not have worked prior to 2008. Because Caesars is no longer beholden to the stockholders’ stock portfolio’s and the need to provide a dividend each quarter, they can re-invest revenue instead of return profits to the shareholders more often. Activity which might be unhealthy with the publicly traded company might be less concerning with the private company.
Still, financial experts ranging from Fitch Ratings to Deutsche Bank have uneasy feelings about where the company is headed. These people are paid to interpret financial signs and portents better than the man on the street, so their unease should be listened to. With that in mind, last week’s sell of four casinos could be a bad sign.
