CAESARS ACQUISITION CO CACQ
November 29, 2013 - 4:34pm EST by
xanadu972
2013 2014
Price: 12.16 EPS $0.00 $0.00
Shares Out. (in M): 136 P/E 0.0x 0.0x
Market Cap (in $M): 1,651 P/FCF 0.0x 0.0x
Net Debt (in $M): 585 EBIT 0 0
TEV ($): 2,236 TEV/EBIT 0.0x 0.0x

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  • Gaming
  • Highly Leveraged
  • Recapitalization
 

Description

I couldn't get tables or diagrams to paste so I uploaded a more complete file to Dropbox.

https://www.dropbox.com/s/y3fnprh46fpj9dl/CACQ.pdf


CACQ is a very compelling, misunderstood, special situation investment which offers ~10-50% upside (The write-up was started when there was more upside).

  • Caesars Entertainment Corp, formerly Harrah ’s Entertainment, is the country’s largest regional gaming operator
  • The company has a growing presence in the online gaming market through its Caesars Interactive Entertainment (CIE) subsidiary
    • CIE offers real money gaming in the UK, France and Italy, as well as social and mobile gaming through its Playtika brand which was acquired in December 2011
    • CIE owns the World Series of Poker brand which offers real money land based tournaments, and will be used to promote its online platform upon legalization in the US
  • Caesars was taken private in January 2008 by a consortium led by TPG and Apollo for $31B ($6B of equity + $25B of debt)
    • In February 2012 the company did an IPO at $9.00 per share
  • The company currently has 136M shares outstanding of which Apollo/TPG own 70%, and Paulson & Co own 10%
  • CZR generates ~$2B in EBITDA annually but has over $23B of debt outstanding (10.1X Debt / EBITDA) and a market cap of ~$3B
    • This high level of debt has led many investors to stay away from the equity
  • Apollo and TPG have proposed to split the company into two pieces via a complex transaction:
    • Over levered but stable gaming company
    • High growth online gaming company with attractive prospects and a net cash position
  • The high growth online gaming company offers a potentially very attractive investment opportunity

 

 

Recent Legalization of Online Gaming in NJ & NV Should Allow CACQ to Generate ~$200 million of Additional Revenue

  • The US had gross gaming revenue of $37 Billion in 2012
  • New Jersey had gaming  of $3 Billion in 2012
  • CZR generated $1.4Billion of  gaming revenue  in NJ in 2012 (45% share)
  • As of today online gaming is legal in NV (poker only), NJ and DE
  • Analysts estimate  NV's online gaming should yield ~ $100 million annually ,NJ’s should generate ~$750 million
  • Over time, I believe that additional states will also allow online gaming, creating a multi-billion dollar market
  • Casinos will soon allow individuals to gamble on their smart phones and tablets

 

CACQ will own 42.4% of Caesars Growth Partners (“CGP”). The remainder will be owned by CZR.

Caesars Growth Partners (CGP) has a76% ownership interest in Caesar’s online gaming assets, which should generate annual revenues of ~$200 million to ~$800 million

CGP also has  Planet Hollywood LV and the Horseshoe Baltimore, two premier properties from Caesar’s portfolio

CGP is  a growth vehicle. As such it will start off with a net cash position and will focus on opportunities that will allow top line growth (new casinos in attractive markets)

Harrah’s has the  largest domestic gaming database in the US. Ability to leverage this  database  with online  gaming operations will be a significant asset

CZR has the right to repurchase shares in CACQ at $17 per share, capping the upside. 

I believe CACQ’s equity is worth at least $12.50 to $17.00 per share

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Wider allowance of online gaming.
Increased familiarity with the Company and its prospects.
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    Description

    I couldn't get tables or diagrams to paste so I uploaded a more complete file to Dropbox.

    https://www.dropbox.com/s/y3fnprh46fpj9dl/CACQ.pdf


    CACQ is a very compelling, misunderstood, special situation investment which offers ~10-50% upside (The write-up was started when there was more upside).

     

     

    Recent Legalization of Online Gaming in NJ & NV Should Allow CACQ to Generate ~$200 million of Additional Revenue

     

    CACQ will own 42.4% of Caesars Growth Partners (“CGP”). The remainder will be owned by CZR.

    Caesars Growth Partners (CGP) has a76% ownership interest in Caesar’s online gaming assets, which should generate annual revenues of ~$200 million to ~$800 million

    CGP also has  Planet Hollywood LV and the Horseshoe Baltimore, two premier properties from Caesar’s portfolio

    CGP is  a growth vehicle. As such it will start off with a net cash position and will focus on opportunities that will allow top line growth (new casinos in attractive markets)

    Harrah’s has the  largest domestic gaming database in the US. Ability to leverage this  database  with online  gaming operations will be a significant asset

    CZR has the right to repurchase shares in CACQ at $17 per share, capping the upside. 

    I believe CACQ’s equity is worth at least $12.50 to $17.00 per share

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Wider allowance of online gaming.
    Increased familiarity with the Company and its prospects.

    Messages


    SubjectMultiples, Margins, and Distress Risk
    Entry12/03/2013 04:07 PM
    Memberbaileyb906
    Planet Hollywood is a below average property in Vegas in terms of room rates, wealth of clientele, average drop etc.  10x is way too high of a multiple.  That is the multiple that all of MGM trades at, and they have the Bellagio, which is one of the 3 most productive properties on the strip and they also have the MGM Grand and the Mirage, which are above average.  I think 8x is more appropriate for PH.
     
    Regional gaming companies are trading 6-7x and don't deserve a higher multiple because of overcapacity, increasing competition, secular declines in slot play, and a pressured macro environment for the low end consumer.  I think Horseshoe probably deserves a 7x, at the high end of the regional range since it is a newer property.
     
    If you make those adjustments, that takes 277 mm off the EV.  This is equivalent to 86c...so your base case valuation goes to 11.82, less than 9% up from where CACQ was when you published and less than 5% above the current quote.
     
    As for the CIE side...margins can vary widely depending on the taxation policy that the various states adopt, which at this point is an unknown for the Upside Case.  I see you are starting with 25% EBITDA margins as an assumption.  This might happen but if you look at BPTY.LN, margins have migrated a lot lower than that for them.  There are all sorts of issues there that have to do with regulatory, competition, and tax in the various jurisdictions where they participate - but margins there have settled in to the 17-20% range.  PTEC.LN has margins in the 40s but I believe they white label and don't have the marketing costs that a CIE will have.  Where did your 25% margin assumption come from?
     
    Could you elaborate more on what constitutes the social games segment and what is the basis for a 12x multiple in that business?  Also in Online Gaming, what assumptions are driving revenue in your base and upside cases?
     
    Finally, if Caesar's Entertainment goes into distress with their $23 bn of debt (something I think is very possible eventually given the secular declines in regional gaming, and the sorry competitive state of much of the Caesars Entertainment casino portfolio after years of under-capex-ing relative to their peers)...what happens to CACQ?  Would the bondholders of Caesar's Entertainment have no claim to the 42% of Caesars Growth Partners assets that CACQ owns?  If the sh*t hits the fan, what is to stop the holders of Caesar's Entertainment debt from clawing at 100% of the Caesar's Growth Partners assets using fraudalent coneyance as their argument?  I'm not saying this is an immediate risk, but if the credit markets ever get less frothy, and regional gaming stays on its current trajectory...it could easily happen that the parent is forced to restructure using bankruptcy.

    SubjectRE: Multiples, Margins, and Distress Risk
    Entry12/03/2013 07:46 PM
    Membertyler939
    Bailey, I think your concerns about bankruptcy are misplaced.  I am not a bankruptcy expert, but those I have talked to are more concerned about litigation expenses should a fraudulent conveyance claim be made then they are that CACQ would actually lose such an argument.  On the other hand, the more likely a CZR bankruptcy looks, the more likely it is that they will lose their call right which is theoretically capping the stock (I say "theoretically" because the Sponsers and Paulson own about 75% of the float and I don't think they are sellers given that this is a natural hedge to their CZR positions and the fact that CACQ owns $1.1 billion of unsecured notes of Caesers Entertainment Operating Company which will give them some leverage in any recapitalization). In my opinion, the prospect of a CZR bankruptcy is a huge positive for CACQ. 

    SubjectRE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 10:49 AM
    Memberbaileyb906
    I am not a distressed expert so you may very well be right re: fraudalent conveyance not being an issue, but you just raised another issue with the NAV being overstated.  The $1.1 bn are in CZR Entertainment bonds which are unsecured.  This very incomplete write up didn't get into what these bonds were, and I still don't know the coupon or duration is on them.  But 90c is likely way too high a mark.  I took a quick look on Bloomberg and there are second lien notes with a coupon over 10 trading in the 50s, and there are senior unsecureds with a single digit coupon trading in the 70s.  I am certainly not going  to spend my time doing a full capital structure analysis of CZR...but I have done enough work to make a good guess that marking those at 90 is too high.  Revising the multiples downward on Planet Hollywood and Horseshoe took almost $1 off the base case.  If you mark those bonds at 70 instead of 90, it's another 68c off the base case.  Basically if you mark PH at 8x, Horseshoe at 7x, and the bonds at 70, the base case is below where the stock is now.
     
    This stock may or may not be compelling, but it is a very uncompelling write-up full of aggressive and unsubstantiated assumptions.

    SubjectRE: RE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 11:28 AM
    Membertyler939

    To rskfrarb, the short answer is you are correct.  The long answer is as follows. Technically, as long as they reemerge from bankruptcy during the call period and meet the other requirements within the call window, the call rights would still be in effect. However, in the event of bankruptcy the sponsors will cease to be majority holders of CZR post-reorg, but will still remain the majority holders of CACQ (which also owns $1.1 billion in CEOC notes) thus having some leverage and all the motivation in the world to negotiate away the call right. Given their presence on all levels of cap structure of both entities, and their unavoidable influence in any potential  negotiations of bankruptcy terms/timeline etc, we think they will likely have the leverage to negotiate new terms that would eliminate the call rights and transfer of value from CACQ to the new CZR. It may be a leap of faith, but we don't believe they would have put $600 million into this new structure without the idea that if things went bad for CZR, they would lose the bulk of their investment and only be limited to a 25% annualized return on their investment in CACQ.


    SubjectRE: NJ poker disapointing
    Entry12/04/2013 02:34 PM
    Memberbaileyb906
    Average players of 140 is horrible liquidity.  Even 10x that is not great.  This is the problem with ring-fenced states...it's unlikely that any state except possibly CA and NY and maybe TX will have enough liquidity as a standalone.

    SubjectRE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 04:33 PM
    Membertyler939
    The call right and hence the cap will only go away if  1) CZR is in default throughout the entire call period or 2) they do not meet the leverage requirements throughout the entire call period, or 3) (and this what I think is most likely should things go bad for CZR)  the Sponsers are able to use their leverage to force CZR to give up their call rights.

    SubjectRE: RE: tyler
    Entry12/04/2013 05:24 PM
    Membertyler939
    I think they are happy with a 10.5% to 25% return providing CZR does well.  If they lose their money on CZR, they are going to want more, IMO.

    SubjectRE: RE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 05:41 PM
    MemberFletch
    i think it is doubtful that the sponsors could force CZR's to give up their call right because that would be damaging the estate of CZR's, which if forced into bankruptcy would not be their's to give away (this would have real implications of fraudulent conveyance).
     
    One other interesting point about the Call provision (as outlined in full detail in section 7.5 of the LLC agreement - which is exhibit 10.1 of the S-1 and can be found here http://www.sec.gov/Archives/edgar/data/1575879/000119312513396887/d579522dex101.htm) is that at least 50% of the call amount has to be paid in CZR's stock.  So assuming that they went through a major restructuring where they equitized most of the debt such that their debt to ebitda ratio is less than 9 and they have $1 billion of liquidity they would have to give up a portion of their stock for it.  If you think that CZR's would not have to file for chapter 11 until 2015 and it would most likely be a long tough bankruptcy, then CZR's would not be able to emerge until probably early 2017, in which case the 25% cap on the stock would put the stock at over $21 which would be close to $3 billion.  So they would then have to come up with $1.5 billion of cash (which would probably have to be through a rights offering) and pay $1.5 billion in stock (which i am sure would be a nice chunk of the market cap) to take out the full CACQ.  Every year that goes by, you continue to accrue at 25%.  Therefore, for all these reasons, I think there is still resasonable upside in this stock
     
     

    SubjectRE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 07:50 PM
    Membertyler939
    Fletch, eliminating the call provision doesn't mean giving up their current stake in growth partners.  Also, some consideration could be paid, either monetary/stock,  or by agreeing not to challenge the a p prepackaged bankruptcy.  If the sponsors are faced with losing the bulk of their investment in CZR, do you believe they sit by and do nothing to maximize the value of their CACQ investment?

    SubjectRE: RE: RE: Multiples, Margins, and Distress Risk
    Entry12/04/2013 11:28 PM
    MemberFletch
    Tyler - to clarify my earlier comment - where i said that "I think there is upside", that is only if you buy into the valuation, something i am not completely sold on.  
     
    Regarding your question, I do not think that the sponsors sit idly, this is Apollo, who knows better than anyone how to make money for themselves at the expense of everyone else, with language in all their documents that make it confusing, at best,  to understand the probable outcomes (look no further than the shenangans that have been discovered on the 2nd lien bonds which can strip away a good portion of their asset value). That being said,  I don't think they can negotiate away the call for no consideration for the estate and just to benefit themselves at another company (CACQ).  The call inherently has value, they can't just give away that value for nothing because it will damage the value of the entire estate.  I think that they set up this call for the following reason - so that they win either way.  
     
    There are two situations as I see it -
     
    1) Although unlikely, Gaming takes off again and CZR grows into its capital structure, where the sponsors maintain their ownership of CZR and CZR is worth a lot more than it is today.  Then they will exercise their call (probably through another rights offering, where they can continue to increase their ownership stake).  
     
    2) I think that the probable scenario, the business continues to deteriorate and CZR has to go through a restructuring.  The bankruptcy will be a long drawn out process, equity holders will get wiped out (I personally am doubtful that CZR will be able to pull off getting rid of the guarantee, thereby wiping out all equity value) and Apollo knows that by the time this bankruptcy exits, it will be difficult to exercise this call (company will have to raise a lot of cash and the dilution to equity shareholders will be great) so either way, they will maintain a controlling stake in the company (Not to mention, that it has been long rumored that the sponsors have stakes in the 2nd lien bonds and the bank debt) and would therefore continue to control the entity post the deal.
     
    All this is a lot of talk for me, because i find almost all the securities to be un-investable, because of all the NON BUSINESS risks in all their securities 
     
    a) I can't invest in the stock of CACQ, where, even if i am comfortable with the business and valuation of the business, the structure of my equity only has the upside of a very high coupon bond, but all the downside risks of a stock,
     
    b) I can't invest in the stock of CZR, because of the risk of being totally wiped out because of a guarantee
     
    c) I can't invest in the unsecured bonds, because they are so below water, you are making a bet on their liquidity and when the sponsors may file for bankruptcy
     
    d) can't buy the 2nd lien bonds because there is a chance they lose their guarantee's and get totally wiped
     
     

    SubjectRE: RE: Multiples, Margins, and Distress Risk
    Entry12/05/2013 09:38 AM
    Membertyler939
    I agree with b-d, as long as investing doesn't include shorting.  As for Cacq, perhaps i would substitute the word speculating as opposed to investing.  I like the dynamic where I believe 75% of the float is locked up, viewing it as preferred stock gets you above $12, I am sure the market believes that assets + the on line gaming make it worth a lot more than $12 should the sponsors in some way change the call write given positions all over the cap structure even if not eliminate it, the fact that it has to be liquidated if CZR can't come up with the purchase price, and I have the shot at retail enamored with internet gambling driving it a lot higher regardless of the fundamentals (see the most recent CZR writeup for a supposedly professional evaluation). 

    SubjectRE: RE: RE: Multiples, Margins, and Distress Risk
    Entry12/05/2013 09:51 AM
    Membertyler939
    As far as the call having value, I agree, but so does the sponsors willingness to agree to any sort of reorganization.  Even if they can't block it, they can draw out the process.

    SubjectRE: RE: RE: RE:
    Entry12/05/2013 09:59 AM
    MemberFletch
    agreed to all your points

    SubjectWhat if CZR distributes CACQ a part of a refi
    Entry01/10/2014 10:10 AM
    Membertyler939
    CACQ has been on fire the last  several days.  The only rational reason I can think of (by rational, I mean efficient market, not quant funds, technical analysis, short squeeze, etc.) is if as part of a second lien reorg, CZR was willing to distribute interests in CACQ and alter the call right in favor of CACQ holders.  Does anyone have any thoughts on this possibility?

    SubjectCACQ
    Entry01/14/2014 10:29 AM
    Membertorico780
    Considering who the sponsor is what are the chances that they DON'T change the call right? 
     
     

    SubjectRE: CACQ
    Entry01/14/2014 10:45 AM
    Membertyler939
    Too many unknowns for me.  It all depends on what debt securities the sponsors own and how they restructure. My only point is that I think it is a mistake to assume that the call right is hard and fast and not subject to change.
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