CAESARS ACQUISITION CO CACQ
August 12, 2016 - 8:59pm EST by
Alpinist
2016 2017
Price: 11.48 EPS nm nm
Shares Out. (in M): 137 P/E nm nm
Market Cap (in M): 1,578 P/FCF 3.1 2.6
Net Debt (in M): 1,315 EBIT 0 0
TEV: 5,381 TEV/EBIT 3.1 2.6

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  • Spin-Off
  • Rights Offering
  • Private Equity (PE)
  • Stub
  • Spin-off via Rights Offering
  • Oversubscription Privilege
  • Event-driven
  • M&A (Mergers & Acquisitions)
  • Special Dividend
 

Description

Caesars Acquisition Company (NASDAQ: CACQ)

·      Caesars Acquisition Company (NASDAQ: CACQ) is a significantly mispriced special situation, with at least two near term catalysts.  The mispricing is caused by the complexity of the situation and the risk of an adverse outcome in pending litigation and the ongoing bankruptcy process of CEOC (see below for more detail).

·      CACQ is a holding company formed to make an equity investment in Caesars Growth Partners LLC (CGP), along with contributions by Caesars Entertainment Corp (CEC or CZR).  

·      CACQ owns 38.8% of CGP (its ownership stake was reduced in April 2016 from 42.6% following an earn out adjustment, because earnings from a specified portion of the social and mobile games business of Caesars Interactive Entertainment, Inc. (CIE) exceeded a predetermined threshold amount in 2015), and CEC owns 61.2% of CGP.  CACQ is the managing member and sole holder of all of CGP’s outstanding voting units.  CGP owns 76% of CIE. 

·      The figures above for Net Debt and TEV are for Caesars Growth Partners LLC.  The TEV/EBIT above is for 2017 and 2018 based on the merged entity, and additional information can be found below.  As discussed in the financial projections linked below, CEC does not project GAAP Net Income for the merged entity, so projected GAAP EPS for the merged entity is not available.

·      Assuming 1) the announced $4.4 billion cash sale of CIE to Giant Interactive Group closes, and 2) the restructuring closes on the terms in the approved Disclosure Statement, the share price of CACQ that would reflect trading in line with the median of companies comparable to New CEC (Wynn Resorts, MGM Resorts, Las Vegas Sands, Pinnacle Entertainment, Boyd Gaming, Isle of Capri Casinos, and Penn National Gaming) is >$33 per share, or roughly 3x the current stock price, giving no credit for growth in EBITDA in 2018 and beyond.

 

·      Although CACQ should be shielded in the case of a potential bankruptcy of CEC (if CEC is ultimately forced into bankruptcy by judgments against it), there is a potential worst case outcome described below in the risks section in which the transactions that established CGP and CAC are rescinded, and CGP would only be entitled to an unsecured claim for the amount of the consideration it paid.  However, since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely risk is that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the price paid for the transferred assets, rather than being at risk of having the transactions rescinded. 

·      With the CGP leverage and concentrated private equity ownership of CACQ, CACQ is akin to a stub stock (the equity in a public LBO), and is likely to be exchanged for another stub stock (New CEC) as part of the merger of CACQ and CEC/CEOC.  The situation is also akin to an early Warren Buffett-style “workout.” 

·      The two potential catalysts are 1) the closing of the sale of the online gaming business of CIE, to be followed by a dividend to CACQ (potentially $6.32 per share), which is not fully appreciated by investors, and 2) Reaching consensual agreements with creditors for a restructuring, to be followed by the closing of a restructuring and the merger of CACQ and CZR/CEOC.

·      On July 30, 2016, CIE announced that a consortium including an affiliate of Shanghai Giant Network Technology will acquire CIE’s social and mobile games business (the "SMG Business") for cash consideration of $4.4 billion (subject to customary purchase price adjustments).  The assets to be sold are limited to the SMG Business and will not include CIE's interest in the WSOP brand and other WSOP-related intellectual property or CIE's online real money gaming business. 

·     A key point: If this CIE transaction is completed prior to the restructuring being completed (a confirmation hearing to vote on the restructuring is set for January 17, 2017), CGP has the ability to make a distribution to CACQ (by dividend or otherwise) up to CACQ’s pro rata share of the net cash proceeds from the transaction (net of taxes, expenses, etc.).  CACQ’s pro rata share of the net cash proceeds from a $4.4 billion sale would be worth $6.32 per CACQ share (55% of the current stock price of $11.48).

 

·     This ability to pay this dividend to CACQ shareholders was *not* in the original Restructuring Support Agreement (RSA), dated 6/12/16, but was added to the amended RSA signed on 7/9/16, and this ability does not seem to be appreciated by investors.  Neither the press release describing the amended RSA nor the summary in the 8K describing the amended RSA mentions the ability to pay this dividend, and I have not seen any mention of it by analysts, reporters, etc.  The description of the ability to pay a dividend to CACQ can only be found in the text of the amended RSA (on the top of pg. 18 in section 16 “CIE Transaction; CAC Liquidity Transactions”).

·      Hamlet Holdings LLC, an entity controlled by Apollo Global Management and TPG Capital, owns 65.58% of CACQ and 60.14% of CZR (so on the margin, if there is a choice between economics accruing to CACQ or to CZR, Apollo and TPG benefit more from those economics accruing to CACQ).  They own a larger percentage of CACQ than of CZR because Apollo and TPG oversubscribed in the rights offering that was used to effect a spinoff in the formation of CACQ (see below for more detail on their participation in the rights offering).  Apollo and TPG along with their legal teams are working hard to reach consensual agreements with creditors for a restructuring and to maximize the value of CACQ shares.

·      In addition, several accomplished investors who own equity in CACQ (Paulson & Co., Soros Fund Management, and Canyon Capital) also own second-lien debt, are amenable to a restructuring agreement, and have been buyers of CACQ in recent quarters.  Paulson & Co. owns 9.6% of CACQ, Soros Fund owns 4.8%, and Canyon Capital owns 1.4%.  Hamlet Holdings together with these investors control 81.3% of CACQ.

 

The change in ownership of CACQ equity during the last 4 quarters by the second-lien holders friendly to Apollo and TPG (Paulson, Soros, and Canyon) has been the following:

 

Paulson & Co.

change

3/31/16

13,141,098

-0.14%

12/31/15

13,159,098

 

9/30/15

13,159,098

 

6/30/15

13,159,098

7.24%

3/30/15

12,270,455

 
     
 

Soros Fund

change

3/31/16

6,535,083

0.8%

12/31/15

6,485,083

3.4%

9/30/15

6,274,465

 

6/30/15

6,274,465

0.3%

3/30/15

6,256,265

 
     
 

Canyon Capital

change

3/31/16

1,883,224

-0.9%

12/31/15

1,900,684

75.1%

9/30/15

1,085,586

51.2%

6/30/15

717,940

 

3/30/15

717,940

 

 

Since CACQ’s formation in 2013, there have been many significant developments at CEOC, Caesars Entertainment, and CGP—too many to detail in this writeup.  CACQ was written up once on VIC by xanadu972 on Nov. 29, 2013 shortly after it was formed, and that writeup has some background on the formation. 

For complete current background on the situation, you should read the following documents:

·      Disclosure Statement that was approved and filed 6/28/16:

https://cases.primeclerk.com/CEOC/Home-DocketInfo?DocAttribute=1284&DocAttrName=PLANDISCLOSURESTATEMENT

Note that Exhibit J (starting on page 1,078) contains the “New CEC Financial Projections.”

·      Examiner Report filed 3/16/16: http://online.wsj.com/public/resources/documents/CaesarsReport03-16-2016.pdf.

The full Examiner report with Appendices can be found at:  https://cases.primeclerk.com/CEOC/Home-DocketInfo filed on 5/16/2016 under Docket #3720 and #3721.

 

The key developments relative to the current CACQ investment opportunity have been the following:

1) CEC’s largest unit (CEOC) filed for Chapter 11 bankruptcy protection on January 15, 2015, and has been negotiating with CEOC’s creditor groups to try to gain their support for a restructuring agreement.  Creditors have brought multiple lawsuits against CEC, which have been temporarily halted while CEC and the creditors pursue talks in mediation.  Junior creditors (holding second-lien debt) led by Appaloosa Management remain the biggest hold-outs in the CEOC bankruptcy, and have said they have as much as $12 billion in claims against CEC, Apollo and TPG.  CEC and CEOC are working with key creditor groups to try to achieve consensual agreements, and they are currently engaged in voluntary mediation over the terms of a plan.  CEC has said that if cases pending in federal and state courts in NY and DE are allowed to proceed, the potential damages could force CEC to also file for Chapter 11. The basic dispute is over each party’s assessment of the legal merits and valuation of the litigation claims. 

In June, Caesars won a reprieve which expires August 29, 2016 against suits in New York and Delaware while it tries to reach a restructuring deal with the creditors.  At the time, Judge Goldgar said the odds of extending the stay “will be slim.”  Goldgar also made it clear that Caesars should try to negotiate a deal with the holdouts rather than pressure them into a cram down settlement.  Caesars has until Monday August 15 to file court papers explaining why the cases should continue to be put on hold so it can finish negotiating deals with junior creditors in its bankrupt operating unit.  Judge Goldgar has set a hearing on the stay for August 23.

On July 31, 2016, CEC, CEOC, and holders of approximately 37% of the second lien notes entered into a restructuring support agreement (RSA).  The RSA will become effective upon the signing of the RSA by creditors holding at least 50.1% of the aggregate outstanding amount of the second lien notes.  However, a group of dissident bondholders including Appaloosa (who as a group hold 54% percent of the second lien notes) has since told Caesars’ bankruptcy mediator that it rejects CEC’s latest offer.  They have also agreed they will not sell their debt to anyone who does not agree to be a holdout as well, according to sources. 

 

2) CEC engaged the Raine Group in May 2016 to explore the sale of the CIE unit of CGP following “unsolicited bids that have exceeded $4 billion.”  CIE is one of the largest online, mobile and social gaming companies and is focused on casino entertainment. 

 

3) On 6/22/16 the bankruptcy judge approved the outline and disclosure statement for CEOC’s Chapter 11 Plan of Reorganization and set a confirmation hearing for January 17, 2017.  CEOC is seeking votes from creditors on its plan, which would cut $8.5 billion of debt (from $18.415b to $9.89b), and split the CEOC unit into a new operating company and a real estate investment trust.  Caesars Entertainment would contribute billions of dollars of cash and equity to CEOC to help repay CEOC's creditors.  Some of that cash would be generated by merging CEC with CACQ. 

 

4) On 7/9/16, CACQ and CZR entered into an Amended and Restated Agreement and Plan of Merger, which amended and restated their Agreement and Plan of Merger, dated 12/21/14.  Under the new agreement, holders of CACQ Common Stock immediately prior to the closing of the merger will receive twenty-seven percent (27%) of the outstanding CEC Common Stock on a fully diluted basis (prior to conversion of the New CEC Convertible Notes).

 

5) In connection with the entry into the Amended Merger Agreement, on 7/9/16, CAC and CEOC agreed to amend and restate the Restructuring Support Agreement (RSA), dated June 12, 2016, among CAC, CEOC and CEC, and each entered into a voting support agreement with respect to the proposed merger with affiliates of Apollo and TPG. 

A key point:  The Amended RSA allows CAC to effect the sale or other transfer of all or any material portion of the CIE business or assets, *and* provides that if any such CIE sale is consummated prior to the effective date of the Plan (a confirmation hearing to vote on the restructuring is set for January 17, 2017), CGP can make a distribution to CACQ (by dividend or otherwise) up to CACQ’s pro rata share (i.e., 38.8%) of the net cash proceeds of such CIE Transaction (net of taxes, transaction expenses and any working capital adjustment, holdback, indemnity payment or escrow for the benefit of the purchaser).  This ability to make a distribution to CACQ was *not* in the original RSA, but was added to the amended RSA signed on 7/9/16.

Interestingly, neither the press release describing the amended RSA nor the summary in the 8K describing the amended RSA mentions this ability to pay this dividend, and I have not seen any mention of it by reporters, analysts, etc.  The description of the ability to pay a dividend to CACQ can only be found in the text of the amended RSA (on the top of pg. 18 in section 16 “CIE Transaction; CAC Liquidity Transactions”).

 

6) On July 30, 2016, CIE announced that a consortium including an affiliate of Shanghai Giant Network Technology will acquire CIE’s social and mobile games business (the "SMG Business") for cash consideration of $4.4 billion (subject to customary purchase price adjustments).  The assets to be sold are limited to the SMG Business and will not include CIE's interest in the WSOP brand and other WSOP-related intellectual property or CIE's online real money gaming business. 

CIE may use the proceeds, subject to certain limitations, for certain permitted uses, including the release of certain bankruptcy claims and indemnification of Purchaser for any bankruptcy-related claims, as well as up to an aggregate amount not to exceed $1.85 billion for the payment of transaction expenses related to the Sale, distribution to minority shareholders or equity holders of CIE, tax payments, one or more distributions or advances to CEC or any of its subsidiaries for the payment of professional fees in an aggregate amount not to exceed $200 million and for the support or advancement of a proposed casino project in South Korea in an aggregate amount not to exceed $100 million.  At the Closing, the parties will also enter into intellectual property licenses with respect to the WSOP and other WSOP-related trademarks owned by CIE for use in Playtika's social and mobile games for a 3% royalty on net revenues.  The annual run rate of the SMG business in Q2 2016 (ending June 2016) was $950 million, so the 3% royalty is currently worth $28.5 million annually.

CAC has not disclosed the cost basis for CIE’s social and mobile games business (and IR confirmed they do not disclose the information).  The estimated cost basis of the assets in CIE has been reported to be $238 million (Playtika: reported $103m; Buffalo Studios: reported $45m; Pacific Interactive: reported up to $90m), and reports following the announcement of the acquisition estimated the cost basis to be $250 million.  To determine after tax proceeds, I used $238 million as the basis to be more conservative (marginally more capital gain is taxable than with a basis of $250m).  CGP owns 76% of CIE, so a $4.4 billion sale of CIE would generate proceeds net of taxes (assuming 35% corporate capital gains tax rate, with no state tax in Nevada) for CGP of $2.24 billion, and CACQ’s pro rata share of that amount is $868 million (worth $6.32 per CACQ share: 55% of the current stock price).

 

Valuation

The Operating Projections for New CEC can be found in Exhibit J of the Disclosure Statement linked above (starting on page 1,078) contains the “New CEC Financial Projections,” and the projections are also in this 8k:  https://www.sec.gov/Archives/edgar/data/858339/000119312516605797/d196895dex991.htm

The New CEC Projections have been adjusted to exclude the ownership percentage attributable to partners and management interest in CIE, Horseshoe Baltimore, and Punta del Este.  The EBITDA projection removes the projected rental payments to PropCo.  Assuming the sale of CIE is completed, I also deducted from the projection a projection for CIE’s EBITDA (net of management interest), and added back the 3% royalty on net revenues of the SMG business (which is included in the agreement to sell CIE for $4.4bn).

The New CEC Projections include projections for Cap Ex.  Since CEC may have been under-investing in cap ex in recent years due to its indebted financial condition, I considered historic cap ex in years prior to the LBO (2001-2008) in evaluating an estimate for maintenance cap ex.  The cap ex projection includes anticipated capital expenditures associated with Las Vegas room renovation projects. Management plans to finish renovating substantially all of its Las Vegas hotel rooms over the next 5-7 years.  The projections contemplate approximately 15K room renovations over the depicted horizon.  Additionally, the forecast includes spend required to properly maintain the facilities and sustain their current competitive positioning.  Because these renovations are required to maintain current competitive positioning, for conservatism, and in the context of the historic cap ex in years prior to the LBO (2001-2008), I assumed all of the projected cap ex to be maintenance cap ex. 

 

2017 (in M)

NEW CEC Adjusted EBITDAR

2,512

PropCo Rent

(640)

New CEC Adjusted EBITDA

1,872

   

Less: CIE EBITDA (net of mgmt interest)

(377)

Plus: 3% CIE Revenue Royalty

28.5

New CEC EBITDA Net of CIE

1,523

New CEC Maintenance Cap Ex

520

New CEC EBITDA – Maintenance Cap Ex

1,003

 

Cash Projection:  The projections assume an opening cash balance of $1,359 million which includes (i) minimum property cash and cage cash, (ii) cash that cannot be distributed from operating entities pursuant to debt agreements, (iii) cash held by CIE domestically and overseas, (iv) cash at insurance captives, and (v) cash at CES.  Assuming a sale of CIE is completed, I deducted the cash assumed to be held by CIE (assumed to be $100 million) from the opening cash balance, for a net opening cash balance of $1,259 million.

 

The Disclosure Statement (on page 15) includes an illustrative organizational chart summarizing the organizational structure of the reorganized entities, including their new capital structure, on the Effective Date.  The anticipated debt balance by entity is the following: 

Projected Debt (M)

1/1/17

CEOC OpCo

2,121

Parent

1,000

CERP

4,614

CGPH Restricted

1,848

Cromwell

175

Baltimore

132

Total

9,890

The debt associated with the casino properties (CERP, CGPH Restricted, Cromwell, and Baltimore: total $6,769 million) will be transferred to PropCo in the restructuring.  So the total debt held by OpCo (New CEC) will be $3,121 million.

Net of the value of the after tax CIE Sale proceeds (both the dividend to CACQ and the remaining ownership held by CZR/New CEC), the valuation of New CEC implied by the current price of CACQ is a multiple of Enterprise Value / (EBITDA - Maintenance Cap Ex) of only 3.1x 2017 EBITDA - Maintenance Cap Ex, and 2.6x 2018 EBITDA - Maintenance Cap Ex: 

Current CACQ Market Cap (M)

1,578

Potential Dividend from Pending CIE Sale (M)

868

Implied Value of CACQ excluding CIE Dividend (M)

710

CACQ Ownership of New CEC

27.0%

Implied Value of Total New CEC Equity (M)

2,628

New CEC Debt (M)

3,121

New CEC Opening Cash Balance (M)

1,259

Implied Total New CEC Enterprise Value (M)

4,490

After Tax Value of New CEC Pro Rata Share of CIE Sale Proceeds (M)

1,369

Net Implied EV of New CEC (M)

3,122

 

 

2017

2018

New CEC EBITDA - Maintenance Cap Ex (M)

1,003

1,198

New CEC EV / (EBITDA - Maintenance Cap Ex)

3.1x

2.6x

 

Assuming 1) the agreed CIE sale closes, and 2) the restructuring closes on the terms in the approved Disclosure Statement, the share price of CACQ that would reflect trading in line with the median of companies comparable to New CEC (Wynn Resorts, MGM Resorts, Las Vegas Sands, Pinnacle Entertainment, Boyd Gaming, Isle of Capri Casinos, and Penn National Gaming) is >$33 per share, or roughly 3x the current price, giving no credit for growth in EBITDA in 2018 and beyond.

_____

For conservatism, I have assigned no value in the analysis above to CEC’s NOLs.  But note that including CEOC, CEC had federal NOL carryforwards of >$4.2 billion as of December 31, 2015.  These NOLs will begin to expire in 2031. NOL carryforwards for the domestic subsidiaries for state income taxes were >$8.2 billion as of December 31, 2015.  These state NOLs will begin to expire in 2034.  It appears to be more likely than not that the benefit from these NOLs for the CEC tax consolidated group will not be realized.  NOL carryforwards of foreign subsidiaries were >$110 million as of December 31, 2015.  The majority of these foreign NOLs have an indefinite carryforward period.  

_____

It is noteworthy that in the formation of CACQ, a rights offering was used to effect a spinoff.  As many VIC members know, when using a rights offering to sell a spinoff to shareholders, a company does not need to seek the highest possible price (in contrast to selling a businesses to another company or in an IPO, both of which require the directors of the parent company as fiduciaries to seek the highest possible price).  The CACQ offering seemed to be intentionally confusing, and most commentators recommended that investors stay on the sidelines.

The rights offering included an oversubscription privilege, a sign of a bargain offering price.  When oversubscription privileges are involved, the less publicized the rights offering, the less likely it is for the rights holders to purchase stock in the rights offering, and the better the opportunity for rights offering investors to buy spinoff shares.  CACQ offered a short time window between the record date (Oct 17, 2013) and the expiration date for the rights offering (Nov 2, 2013), so there was only two weeks to give exercise instructions to your broker (to give them two days to exercise): less time than a typical rights offering. 

The S1 also obfuscated Apollo’s and TPG’s intent to purchase shares in the offering and over-subscription, but Apollo and TPG fully exercised both their initial stake and their over-subscription privileges.  The initial S1 for CACQ mentioned 19 times that TPG and Apollo planned to purchase “at least $500.0 million” of CACQ stock, which would have been less than their pro rata share including affiliates.  So numerous articles were written about Apollo and TPG investing less than their pro rata share, along with the message that since they were investing less than pro rata, other investors should do the same.  The S1 only once mentioned that “Affiliates of the Sponsors, which beneficially own approximately 70% of Caesars Entertainment’s outstanding shares of common stock as of the date hereof, have indicated that they currently intend to exercise their rights under the basic subscription right in full.”  The initial prospectus did not initially say anything about the intention of the Sponsors or Affiliates of the Sponsors in terms of the over-subscription privilege, and said “Affiliates of the Sponsors have not indicated whether they intend to exercise their over-subscription privilege.”

After CZR sold some stock, Apollo’s and TPG’s ownership were decreased from their stake in the original S1, and the final prospectus stated that “The Sponsors have advised Caesars Entertainment that the affiliates of the Sponsors holding common stock of Caesars Entertainment intend to exercise their basic subscription rights in full for $457.8 million (which would represent approximately 38.7% of our Class A common stock assuming the subscription rights are exercised in full by all holders of the subscription rights) and intend to exercise, if necessary, their over-subscription privilege for an amount such that subscription rights of at least $500.0 million are exercised in total, though they have not entered into any agreement to do so.”

But TPG and Apollo filed a 13D about their CACQ purchases on 11/27/13, and they and their affiliates ended up purchasing a total of $778 million of CACQ stock in the rights offering (the $457.8 million originally announced, plus $291 million invested by their co-investment affiliates, plus $29 million purchased in the over-subscription).  They believed the company was undervalued, and fully exercised their over-subscription privileges.

_____

Risks

The official committee of second-lien lenders in the Chapter 11 proceedings are pursuing fraudulent conveyance and other claims arising out of pre-petition transactions by CEC that the lenders contend stripped CEOC of valuable assets that could otherwise have been used to satisfy their claims.  These transactions lie at the heart of the conflicts that have impeded CEOC and its creditors from agreeing on a consensual reorganization plan.  A court-appointed examiner in the case (Richard Davis) concluded in a report filed in March 2016 that the company had claims of “varying strength” arising out of the transactions, placing potential damages arising out of claims rated as strong (meaning a high likelihood of success) or reasonable (meaning better than a 50/50 chance of success) in a range from $3.6–5.1 billion.  According to the second-lien committee, other potential claims for billions of dollars exist as well, although Davis did not quantify claims that he deemed to have less than a 50/50 chance of success.  Davis’ report found potential claims for both intentional and constructive fraudulent conveyances, and breaches of fiduciary duties.

 

CEOC has said that if it is unable to reach a reorganization settlement, it might seek to cram down the reorganization plan currently on the table if they can get creditors holding 80% percent of the debt to agree to the plan.  However, Judge Goldgar has made it clear that Caesars should try to negotiate a deal with the holdouts rather than pressure them into a cram down settlement. 

Senior first-lien creditors (including Elliott Management) hold $12 billion of CEOC’s $18.4 billion in total debt.  The second-lien lenders hold $5.3 billion in loans (28.5% of the total).  37% of second-lien lenders have agreed to the RSA, which along with almost all of the rest of the debt would get them over 80% of the total. Several investors who own second-lien debt (Paulson, Soros, and Canyon Capital) also own equity in CACQ, are amenable to a restructuring agreement, and have been buyers of CACQ in recent quarters.

On 6/15/16, the bankruptcy Judge Benjamin Goldgar temporarily halted lawsuits seeking $11.4 billion in damages from CZR, and urged the parties in the bankruptcy of CEOC to settle before an injunction expires in August.  Several hedge funds that own bonds are suing CZR in New York and Delaware, alleging it reneged on guarantees from bonds issued by CEOC prior to its bankruptcy.  Caesars is facing $7.7 billion in claims in New York and $3.7 billion in Delaware from the bondholder lawsuits.  Caesars has denied wrongdoing and said it could be forced into bankruptcy along with CEOC if courts rule in favor of the bondholders. 

CACQ is subject to fraudulent transfer litigation that could require it to return the assets acquired in the Transactions, or their value, to Caesars Entertainment.

A court could potentially “collapse” the component steps of the restructuring into a single set of integrated transactions to determine whether the restructuring overall affected a fraudulent transfer.  It is possible that CGP may have to return the assets or their value to Caesars Entertainment or be forced to pay additional amounts therefor.  Monetary damages are the most common remedy in fraudulent transfer cases, but in certain cases the court could require that the property that was subject to transfer be returned to CEOC, particularly where damages are difficult to calculate.   If the transferee cannot establish its good faith, the transferee will only be entitled to an unsecured claim for the amount of the consideration it paid. Where good faith is not established and monetary damages are awarded, the damage award thus would be based on the value of the asset transferred and the transferee would not be entitled to an offset in the amount of the consideration.  The fact that the transaction only proceeded once a fairness opinion from a reputable investment bank was provided, after genuine bargaining over the price, is important to the assessment of CGP’s good faith.

A bankruptcy court may conclude that the Transactions constituted a disguised financing rather than a true sale and as a result CACQ would no longer have ownership and control over assets sold or contributed to Growth Partners to the extent as it does now.

In such case, the court would deem CGP’s assets as belonging to CEC, and consider CAC to be CEC’s lender to the extent of the purchase price CGP paid for those assets. While CACQ would have a claim against CEC for the amounts paid to CEC for the assets, it would no longer have ownership and control over the assets to the same extent as it does now.  Moreover, if CACQ’s claim against Caesars Entertainment is considered a financing, there is no guaranty that it will be deemed a secured claim entitled to a priority right of repayment from the assets, rather than a general unsecured claim against the bankruptcy estate that shares pro rata with other creditors in any recovery from the residual value of the bankruptcy estates.

A bankruptcy court could substantively consolidate the bankruptcy estates of Caesars Entertainment and its debtor subsidiaries with Growth Partners, which would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP.

Even though CGP has certain bankruptcy remote features that restrict its ability to file for bankruptcy relief, there can be no assurance that a bankruptcy court will not direct CGP’s substantive consolidation with CEC or a subsidiary of CEC in a bankruptcy case of CEC or such subsidiary even if CGP does not itself file a bankruptcy petition.

The Official Committee of Second Priority Noteholders filed a standing motion in bankruptcy court on May 13, 2016 seeking standing to commence claims on behalf of CEOC's estate and seeks recovery of assets transferred from CEOC alleging claims on behalf of CEOC's estate ranging in value from $8.1 billion to $12.6 billion against all defendants, which included “In the event avoidance or rescission of the Contested Transfers, or any of them, is not practicable, award Plaintiff monetary damages in an amount sufficient to compensate Plaintiffs for the loss of the transferred assets in an amount equal, as to each asset transfer, to the greater of: (i) the value of each such asset transferred as of the date of entry of judgment, or (ii) the value of each such asset transferred as of the date of such transfer.”  Since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely risk is that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the price paid for the transferred assets, rather than being at risk of having the transactions rescinded.   

CEC and CGP have increased the amount of their contributions to creditors in a potential restructuring numerous times already, and likely will have to offer additional contributions to get to an agreed settlement.  The contributions are currently in the range of the potential damages arising out of claims rated as strong (meaning a high likelihood of success) or reasonable (meaning better than a 50/50 chance of success) estimated by the court-appointed examiner. 

 

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

Catalyst

1) Closing the sale of CIE's social and mobile games business, followed by a dividend to CACQ shareholders of CACQ’s pro rata share of the net cash proceeds from the CIE Transaction (net of taxes, expenses, escrow, etc.).  Value of $6.32 per CACQ share: 55% of the current stock price.

 

2) Reaching consensual agreements with creditors for a restructuring, which would include a CACQ / CZR merger, resulting in CACQ shareholders owning 27% of the post-merger entity.

 

 

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    Description

    Caesars Acquisition Company (NASDAQ: CACQ)

    ·      Caesars Acquisition Company (NASDAQ: CACQ) is a significantly mispriced special situation, with at least two near term catalysts.  The mispricing is caused by the complexity of the situation and the risk of an adverse outcome in pending litigation and the ongoing bankruptcy process of CEOC (see below for more detail).

    ·      CACQ is a holding company formed to make an equity investment in Caesars Growth Partners LLC (CGP), along with contributions by Caesars Entertainment Corp (CEC or CZR).  

    ·      CACQ owns 38.8% of CGP (its ownership stake was reduced in April 2016 from 42.6% following an earn out adjustment, because earnings from a specified portion of the social and mobile games business of Caesars Interactive Entertainment, Inc. (CIE) exceeded a predetermined threshold amount in 2015), and CEC owns 61.2% of CGP.  CACQ is the managing member and sole holder of all of CGP’s outstanding voting units.  CGP owns 76% of CIE. 

    ·      The figures above for Net Debt and TEV are for Caesars Growth Partners LLC.  The TEV/EBIT above is for 2017 and 2018 based on the merged entity, and additional information can be found below.  As discussed in the financial projections linked below, CEC does not project GAAP Net Income for the merged entity, so projected GAAP EPS for the merged entity is not available.

    ·      Assuming 1) the announced $4.4 billion cash sale of CIE to Giant Interactive Group closes, and 2) the restructuring closes on the terms in the approved Disclosure Statement, the share price of CACQ that would reflect trading in line with the median of companies comparable to New CEC (Wynn Resorts, MGM Resorts, Las Vegas Sands, Pinnacle Entertainment, Boyd Gaming, Isle of Capri Casinos, and Penn National Gaming) is >$33 per share, or roughly 3x the current stock price, giving no credit for growth in EBITDA in 2018 and beyond.

     

    ·      Although CACQ should be shielded in the case of a potential bankruptcy of CEC (if CEC is ultimately forced into bankruptcy by judgments against it), there is a potential worst case outcome described below in the risks section in which the transactions that established CGP and CAC are rescinded, and CGP would only be entitled to an unsecured claim for the amount of the consideration it paid.  However, since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely risk is that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the price paid for the transferred assets, rather than being at risk of having the transactions rescinded. 

    ·      With the CGP leverage and concentrated private equity ownership of CACQ, CACQ is akin to a stub stock (the equity in a public LBO), and is likely to be exchanged for another stub stock (New CEC) as part of the merger of CACQ and CEC/CEOC.  The situation is also akin to an early Warren Buffett-style “workout.” 

    ·      The two potential catalysts are 1) the closing of the sale of the online gaming business of CIE, to be followed by a dividend to CACQ (potentially $6.32 per share), which is not fully appreciated by investors, and 2) Reaching consensual agreements with creditors for a restructuring, to be followed by the closing of a restructuring and the merger of CACQ and CZR/CEOC.

    ·      On July 30, 2016, CIE announced that a consortium including an affiliate of Shanghai Giant Network Technology will acquire CIE’s social and mobile games business (the "SMG Business") for cash consideration of $4.4 billion (subject to customary purchase price adjustments).  The assets to be sold are limited to the SMG Business and will not include CIE's interest in the WSOP brand and other WSOP-related intellectual property or CIE's online real money gaming business. 

    ·     A key point: If this CIE transaction is completed prior to the restructuring being completed (a confirmation hearing to vote on the restructuring is set for January 17, 2017), CGP has the ability to make a distribution to CACQ (by dividend or otherwise) up to CACQ’s pro rata share of the net cash proceeds from the transaction (net of taxes, expenses, etc.).  CACQ’s pro rata share of the net cash proceeds from a $4.4 billion sale would be worth $6.32 per CACQ share (55% of the current stock price of $11.48).

     

    ·     This ability to pay this dividend to CACQ shareholders was *not* in the original Restructuring Support Agreement (RSA), dated 6/12/16, but was added to the amended RSA signed on 7/9/16, and this ability does not seem to be appreciated by investors.  Neither the press release describing the amended RSA nor the summary in the 8K describing the amended RSA mentions the ability to pay this dividend, and I have not seen any mention of it by analysts, reporters, etc.  The description of the ability to pay a dividend to CACQ can only be found in the text of the amended RSA (on the top of pg. 18 in section 16 “CIE Transaction; CAC Liquidity Transactions”).

    ·      Hamlet Holdings LLC, an entity controlled by Apollo Global Management and TPG Capital, owns 65.58% of CACQ and 60.14% of CZR (so on the margin, if there is a choice between economics accruing to CACQ or to CZR, Apollo and TPG benefit more from those economics accruing to CACQ).  They own a larger percentage of CACQ than of CZR because Apollo and TPG oversubscribed in the rights offering that was used to effect a spinoff in the formation of CACQ (see below for more detail on their participation in the rights offering).  Apollo and TPG along with their legal teams are working hard to reach consensual agreements with creditors for a restructuring and to maximize the value of CACQ shares.

    ·      In addition, several accomplished investors who own equity in CACQ (Paulson & Co., Soros Fund Management, and Canyon Capital) also own second-lien debt, are amenable to a restructuring agreement, and have been buyers of CACQ in recent quarters.  Paulson & Co. owns 9.6% of CACQ, Soros Fund owns 4.8%, and Canyon Capital owns 1.4%.  Hamlet Holdings together with these investors control 81.3% of CACQ.

     

    The change in ownership of CACQ equity during the last 4 quarters by the second-lien holders friendly to Apollo and TPG (Paulson, Soros, and Canyon) has been the following:

     

    Paulson & Co.

    change

    3/31/16

    13,141,098

    -0.14%

    12/31/15

    13,159,098

     

    9/30/15

    13,159,098

     

    6/30/15

    13,159,098

    7.24%

    3/30/15

    12,270,455

     
         
     

    Soros Fund

    change

    3/31/16

    6,535,083

    0.8%

    12/31/15

    6,485,083

    3.4%

    9/30/15

    6,274,465

     

    6/30/15

    6,274,465

    0.3%

    3/30/15

    6,256,265

     
         
     

    Canyon Capital

    change

    3/31/16

    1,883,224

    -0.9%

    12/31/15

    1,900,684

    75.1%

    9/30/15

    1,085,586

    51.2%

    6/30/15

    717,940

     

    3/30/15

    717,940

     

     

    Since CACQ’s formation in 2013, there have been many significant developments at CEOC, Caesars Entertainment, and CGP—too many to detail in this writeup.  CACQ was written up once on VIC by xanadu972 on Nov. 29, 2013 shortly after it was formed, and that writeup has some background on the formation. 

    For complete current background on the situation, you should read the following documents:

    ·      Disclosure Statement that was approved and filed 6/28/16:

    https://cases.primeclerk.com/CEOC/Home-DocketInfo?DocAttribute=1284&DocAttrName=PLANDISCLOSURESTATEMENT

    Note that Exhibit J (starting on page 1,078) contains the “New CEC Financial Projections.”

    ·      Examiner Report filed 3/16/16: http://online.wsj.com/public/resources/documents/CaesarsReport03-16-2016.pdf.

    The full Examiner report with Appendices can be found at:  https://cases.primeclerk.com/CEOC/Home-DocketInfo filed on 5/16/2016 under Docket #3720 and #3721.

     

    The key developments relative to the current CACQ investment opportunity have been the following:

    1) CEC’s largest unit (CEOC) filed for Chapter 11 bankruptcy protection on January 15, 2015, and has been negotiating with CEOC’s creditor groups to try to gain their support for a restructuring agreement.  Creditors have brought multiple lawsuits against CEC, which have been temporarily halted while CEC and the creditors pursue talks in mediation.  Junior creditors (holding second-lien debt) led by Appaloosa Management remain the biggest hold-outs in the CEOC bankruptcy, and have said they have as much as $12 billion in claims against CEC, Apollo and TPG.  CEC and CEOC are working with key creditor groups to try to achieve consensual agreements, and they are currently engaged in voluntary mediation over the terms of a plan.  CEC has said that if cases pending in federal and state courts in NY and DE are allowed to proceed, the potential damages could force CEC to also file for Chapter 11. The basic dispute is over each party’s assessment of the legal merits and valuation of the litigation claims. 

    In June, Caesars won a reprieve which expires August 29, 2016 against suits in New York and Delaware while it tries to reach a restructuring deal with the creditors.  At the time, Judge Goldgar said the odds of extending the stay “will be slim.”  Goldgar also made it clear that Caesars should try to negotiate a deal with the holdouts rather than pressure them into a cram down settlement.  Caesars has until Monday August 15 to file court papers explaining why the cases should continue to be put on hold so it can finish negotiating deals with junior creditors in its bankrupt operating unit.  Judge Goldgar has set a hearing on the stay for August 23.

    On July 31, 2016, CEC, CEOC, and holders of approximately 37% of the second lien notes entered into a restructuring support agreement (RSA).  The RSA will become effective upon the signing of the RSA by creditors holding at least 50.1% of the aggregate outstanding amount of the second lien notes.  However, a group of dissident bondholders including Appaloosa (who as a group hold 54% percent of the second lien notes) has since told Caesars’ bankruptcy mediator that it rejects CEC’s latest offer.  They have also agreed they will not sell their debt to anyone who does not agree to be a holdout as well, according to sources. 

     

    2) CEC engaged the Raine Group in May 2016 to explore the sale of the CIE unit of CGP following “unsolicited bids that have exceeded $4 billion.”  CIE is one of the largest online, mobile and social gaming companies and is focused on casino entertainment. 

     

    3) On 6/22/16 the bankruptcy judge approved the outline and disclosure statement for CEOC’s Chapter 11 Plan of Reorganization and set a confirmation hearing for January 17, 2017.  CEOC is seeking votes from creditors on its plan, which would cut $8.5 billion of debt (from $18.415b to $9.89b), and split the CEOC unit into a new operating company and a real estate investment trust.  Caesars Entertainment would contribute billions of dollars of cash and equity to CEOC to help repay CEOC's creditors.  Some of that cash would be generated by merging CEC with CACQ. 

     

    4) On 7/9/16, CACQ and CZR entered into an Amended and Restated Agreement and Plan of Merger, which amended and restated their Agreement and Plan of Merger, dated 12/21/14.  Under the new agreement, holders of CACQ Common Stock immediately prior to the closing of the merger will receive twenty-seven percent (27%) of the outstanding CEC Common Stock on a fully diluted basis (prior to conversion of the New CEC Convertible Notes).

     

    5) In connection with the entry into the Amended Merger Agreement, on 7/9/16, CAC and CEOC agreed to amend and restate the Restructuring Support Agreement (RSA), dated June 12, 2016, among CAC, CEOC and CEC, and each entered into a voting support agreement with respect to the proposed merger with affiliates of Apollo and TPG. 

    A key point:  The Amended RSA allows CAC to effect the sale or other transfer of all or any material portion of the CIE business or assets, *and* provides that if any such CIE sale is consummated prior to the effective date of the Plan (a confirmation hearing to vote on the restructuring is set for January 17, 2017), CGP can make a distribution to CACQ (by dividend or otherwise) up to CACQ’s pro rata share (i.e., 38.8%) of the net cash proceeds of such CIE Transaction (net of taxes, transaction expenses and any working capital adjustment, holdback, indemnity payment or escrow for the benefit of the purchaser).  This ability to make a distribution to CACQ was *not* in the original RSA, but was added to the amended RSA signed on 7/9/16.

    Interestingly, neither the press release describing the amended RSA nor the summary in the 8K describing the amended RSA mentions this ability to pay this dividend, and I have not seen any mention of it by reporters, analysts, etc.  The description of the ability to pay a dividend to CACQ can only be found in the text of the amended RSA (on the top of pg. 18 in section 16 “CIE Transaction; CAC Liquidity Transactions”).

     

    6) On July 30, 2016, CIE announced that a consortium including an affiliate of Shanghai Giant Network Technology will acquire CIE’s social and mobile games business (the "SMG Business") for cash consideration of $4.4 billion (subject to customary purchase price adjustments).  The assets to be sold are limited to the SMG Business and will not include CIE's interest in the WSOP brand and other WSOP-related intellectual property or CIE's online real money gaming business. 

    CIE may use the proceeds, subject to certain limitations, for certain permitted uses, including the release of certain bankruptcy claims and indemnification of Purchaser for any bankruptcy-related claims, as well as up to an aggregate amount not to exceed $1.85 billion for the payment of transaction expenses related to the Sale, distribution to minority shareholders or equity holders of CIE, tax payments, one or more distributions or advances to CEC or any of its subsidiaries for the payment of professional fees in an aggregate amount not to exceed $200 million and for the support or advancement of a proposed casino project in South Korea in an aggregate amount not to exceed $100 million.  At the Closing, the parties will also enter into intellectual property licenses with respect to the WSOP and other WSOP-related trademarks owned by CIE for use in Playtika's social and mobile games for a 3% royalty on net revenues.  The annual run rate of the SMG business in Q2 2016 (ending June 2016) was $950 million, so the 3% royalty is currently worth $28.5 million annually.

    CAC has not disclosed the cost basis for CIE’s social and mobile games business (and IR confirmed they do not disclose the information).  The estimated cost basis of the assets in CIE has been reported to be $238 million (Playtika: reported $103m; Buffalo Studios: reported $45m; Pacific Interactive: reported up to $90m), and reports following the announcement of the acquisition estimated the cost basis to be $250 million.  To determine after tax proceeds, I used $238 million as the basis to be more conservative (marginally more capital gain is taxable than with a basis of $250m).  CGP owns 76% of CIE, so a $4.4 billion sale of CIE would generate proceeds net of taxes (assuming 35% corporate capital gains tax rate, with no state tax in Nevada) for CGP of $2.24 billion, and CACQ’s pro rata share of that amount is $868 million (worth $6.32 per CACQ share: 55% of the current stock price).

     

    Valuation

    The Operating Projections for New CEC can be found in Exhibit J of the Disclosure Statement linked above (starting on page 1,078) contains the “New CEC Financial Projections,” and the projections are also in this 8k:  https://www.sec.gov/Archives/edgar/data/858339/000119312516605797/d196895dex991.htm

    The New CEC Projections have been adjusted to exclude the ownership percentage attributable to partners and management interest in CIE, Horseshoe Baltimore, and Punta del Este.  The EBITDA projection removes the projected rental payments to PropCo.  Assuming the sale of CIE is completed, I also deducted from the projection a projection for CIE’s EBITDA (net of management interest), and added back the 3% royalty on net revenues of the SMG business (which is included in the agreement to sell CIE for $4.4bn).

    The New CEC Projections include projections for Cap Ex.  Since CEC may have been under-investing in cap ex in recent years due to its indebted financial condition, I considered historic cap ex in years prior to the LBO (2001-2008) in evaluating an estimate for maintenance cap ex.  The cap ex projection includes anticipated capital expenditures associated with Las Vegas room renovation projects. Management plans to finish renovating substantially all of its Las Vegas hotel rooms over the next 5-7 years.  The projections contemplate approximately 15K room renovations over the depicted horizon.  Additionally, the forecast includes spend required to properly maintain the facilities and sustain their current competitive positioning.  Because these renovations are required to maintain current competitive positioning, for conservatism, and in the context of the historic cap ex in years prior to the LBO (2001-2008), I assumed all of the projected cap ex to be maintenance cap ex. 

     

    2017 (in M)

    NEW CEC Adjusted EBITDAR

    2,512

    PropCo Rent

    (640)

    New CEC Adjusted EBITDA

    1,872

       

    Less: CIE EBITDA (net of mgmt interest)

    (377)

    Plus: 3% CIE Revenue Royalty

    28.5

    New CEC EBITDA Net of CIE

    1,523

    New CEC Maintenance Cap Ex

    520

    New CEC EBITDA – Maintenance Cap Ex

    1,003

     

    Cash Projection:  The projections assume an opening cash balance of $1,359 million which includes (i) minimum property cash and cage cash, (ii) cash that cannot be distributed from operating entities pursuant to debt agreements, (iii) cash held by CIE domestically and overseas, (iv) cash at insurance captives, and (v) cash at CES.  Assuming a sale of CIE is completed, I deducted the cash assumed to be held by CIE (assumed to be $100 million) from the opening cash balance, for a net opening cash balance of $1,259 million.

     

    The Disclosure Statement (on page 15) includes an illustrative organizational chart summarizing the organizational structure of the reorganized entities, including their new capital structure, on the Effective Date.  The anticipated debt balance by entity is the following: 

    Projected Debt (M)

    1/1/17

    CEOC OpCo

    2,121

    Parent

    1,000

    CERP

    4,614

    CGPH Restricted

    1,848

    Cromwell

    175

    Baltimore

    132

    Total

    9,890

    The debt associated with the casino properties (CERP, CGPH Restricted, Cromwell, and Baltimore: total $6,769 million) will be transferred to PropCo in the restructuring.  So the total debt held by OpCo (New CEC) will be $3,121 million.

    Net of the value of the after tax CIE Sale proceeds (both the dividend to CACQ and the remaining ownership held by CZR/New CEC), the valuation of New CEC implied by the current price of CACQ is a multiple of Enterprise Value / (EBITDA - Maintenance Cap Ex) of only 3.1x 2017 EBITDA - Maintenance Cap Ex, and 2.6x 2018 EBITDA - Maintenance Cap Ex: 

    Current CACQ Market Cap (M)

    1,578

    Potential Dividend from Pending CIE Sale (M)

    868

    Implied Value of CACQ excluding CIE Dividend (M)

    710

    CACQ Ownership of New CEC

    27.0%

    Implied Value of Total New CEC Equity (M)

    2,628

    New CEC Debt (M)

    3,121

    New CEC Opening Cash Balance (M)

    1,259

    Implied Total New CEC Enterprise Value (M)

    4,490

    After Tax Value of New CEC Pro Rata Share of CIE Sale Proceeds (M)

    1,369

    Net Implied EV of New CEC (M)

    3,122

     

     

    2017

    2018

    New CEC EBITDA - Maintenance Cap Ex (M)

    1,003

    1,198

    New CEC EV / (EBITDA - Maintenance Cap Ex)

    3.1x

    2.6x

     

    Assuming 1) the agreed CIE sale closes, and 2) the restructuring closes on the terms in the approved Disclosure Statement, the share price of CACQ that would reflect trading in line with the median of companies comparable to New CEC (Wynn Resorts, MGM Resorts, Las Vegas Sands, Pinnacle Entertainment, Boyd Gaming, Isle of Capri Casinos, and Penn National Gaming) is >$33 per share, or roughly 3x the current price, giving no credit for growth in EBITDA in 2018 and beyond.

    _____

    For conservatism, I have assigned no value in the analysis above to CEC’s NOLs.  But note that including CEOC, CEC had federal NOL carryforwards of >$4.2 billion as of December 31, 2015.  These NOLs will begin to expire in 2031. NOL carryforwards for the domestic subsidiaries for state income taxes were >$8.2 billion as of December 31, 2015.  These state NOLs will begin to expire in 2034.  It appears to be more likely than not that the benefit from these NOLs for the CEC tax consolidated group will not be realized.  NOL carryforwards of foreign subsidiaries were >$110 million as of December 31, 2015.  The majority of these foreign NOLs have an indefinite carryforward period.  

    _____

    It is noteworthy that in the formation of CACQ, a rights offering was used to effect a spinoff.  As many VIC members know, when using a rights offering to sell a spinoff to shareholders, a company does not need to seek the highest possible price (in contrast to selling a businesses to another company or in an IPO, both of which require the directors of the parent company as fiduciaries to seek the highest possible price).  The CACQ offering seemed to be intentionally confusing, and most commentators recommended that investors stay on the sidelines.

    The rights offering included an oversubscription privilege, a sign of a bargain offering price.  When oversubscription privileges are involved, the less publicized the rights offering, the less likely it is for the rights holders to purchase stock in the rights offering, and the better the opportunity for rights offering investors to buy spinoff shares.  CACQ offered a short time window between the record date (Oct 17, 2013) and the expiration date for the rights offering (Nov 2, 2013), so there was only two weeks to give exercise instructions to your broker (to give them two days to exercise): less time than a typical rights offering. 

    The S1 also obfuscated Apollo’s and TPG’s intent to purchase shares in the offering and over-subscription, but Apollo and TPG fully exercised both their initial stake and their over-subscription privileges.  The initial S1 for CACQ mentioned 19 times that TPG and Apollo planned to purchase “at least $500.0 million” of CACQ stock, which would have been less than their pro rata share including affiliates.  So numerous articles were written about Apollo and TPG investing less than their pro rata share, along with the message that since they were investing less than pro rata, other investors should do the same.  The S1 only once mentioned that “Affiliates of the Sponsors, which beneficially own approximately 70% of Caesars Entertainment’s outstanding shares of common stock as of the date hereof, have indicated that they currently intend to exercise their rights under the basic subscription right in full.”  The initial prospectus did not initially say anything about the intention of the Sponsors or Affiliates of the Sponsors in terms of the over-subscription privilege, and said “Affiliates of the Sponsors have not indicated whether they intend to exercise their over-subscription privilege.”

    After CZR sold some stock, Apollo’s and TPG’s ownership were decreased from their stake in the original S1, and the final prospectus stated that “The Sponsors have advised Caesars Entertainment that the affiliates of the Sponsors holding common stock of Caesars Entertainment intend to exercise their basic subscription rights in full for $457.8 million (which would represent approximately 38.7% of our Class A common stock assuming the subscription rights are exercised in full by all holders of the subscription rights) and intend to exercise, if necessary, their over-subscription privilege for an amount such that subscription rights of at least $500.0 million are exercised in total, though they have not entered into any agreement to do so.”

    But TPG and Apollo filed a 13D about their CACQ purchases on 11/27/13, and they and their affiliates ended up purchasing a total of $778 million of CACQ stock in the rights offering (the $457.8 million originally announced, plus $291 million invested by their co-investment affiliates, plus $29 million purchased in the over-subscription).  They believed the company was undervalued, and fully exercised their over-subscription privileges.

    _____

    Risks

    The official committee of second-lien lenders in the Chapter 11 proceedings are pursuing fraudulent conveyance and other claims arising out of pre-petition transactions by CEC that the lenders contend stripped CEOC of valuable assets that could otherwise have been used to satisfy their claims.  These transactions lie at the heart of the conflicts that have impeded CEOC and its creditors from agreeing on a consensual reorganization plan.  A court-appointed examiner in the case (Richard Davis) concluded in a report filed in March 2016 that the company had claims of “varying strength” arising out of the transactions, placing potential damages arising out of claims rated as strong (meaning a high likelihood of success) or reasonable (meaning better than a 50/50 chance of success) in a range from $3.6–5.1 billion.  According to the second-lien committee, other potential claims for billions of dollars exist as well, although Davis did not quantify claims that he deemed to have less than a 50/50 chance of success.  Davis’ report found potential claims for both intentional and constructive fraudulent conveyances, and breaches of fiduciary duties.

     

    CEOC has said that if it is unable to reach a reorganization settlement, it might seek to cram down the reorganization plan currently on the table if they can get creditors holding 80% percent of the debt to agree to the plan.  However, Judge Goldgar has made it clear that Caesars should try to negotiate a deal with the holdouts rather than pressure them into a cram down settlement. 

    Senior first-lien creditors (including Elliott Management) hold $12 billion of CEOC’s $18.4 billion in total debt.  The second-lien lenders hold $5.3 billion in loans (28.5% of the total).  37% of second-lien lenders have agreed to the RSA, which along with almost all of the rest of the debt would get them over 80% of the total. Several investors who own second-lien debt (Paulson, Soros, and Canyon Capital) also own equity in CACQ, are amenable to a restructuring agreement, and have been buyers of CACQ in recent quarters.

    On 6/15/16, the bankruptcy Judge Benjamin Goldgar temporarily halted lawsuits seeking $11.4 billion in damages from CZR, and urged the parties in the bankruptcy of CEOC to settle before an injunction expires in August.  Several hedge funds that own bonds are suing CZR in New York and Delaware, alleging it reneged on guarantees from bonds issued by CEOC prior to its bankruptcy.  Caesars is facing $7.7 billion in claims in New York and $3.7 billion in Delaware from the bondholder lawsuits.  Caesars has denied wrongdoing and said it could be forced into bankruptcy along with CEOC if courts rule in favor of the bondholders. 

    CACQ is subject to fraudulent transfer litigation that could require it to return the assets acquired in the Transactions, or their value, to Caesars Entertainment.

    A court could potentially “collapse” the component steps of the restructuring into a single set of integrated transactions to determine whether the restructuring overall affected a fraudulent transfer.  It is possible that CGP may have to return the assets or their value to Caesars Entertainment or be forced to pay additional amounts therefor.  Monetary damages are the most common remedy in fraudulent transfer cases, but in certain cases the court could require that the property that was subject to transfer be returned to CEOC, particularly where damages are difficult to calculate.   If the transferee cannot establish its good faith, the transferee will only be entitled to an unsecured claim for the amount of the consideration it paid. Where good faith is not established and monetary damages are awarded, the damage award thus would be based on the value of the asset transferred and the transferee would not be entitled to an offset in the amount of the consideration.  The fact that the transaction only proceeded once a fairness opinion from a reputable investment bank was provided, after genuine bargaining over the price, is important to the assessment of CGP’s good faith.

    A bankruptcy court may conclude that the Transactions constituted a disguised financing rather than a true sale and as a result CACQ would no longer have ownership and control over assets sold or contributed to Growth Partners to the extent as it does now.

    In such case, the court would deem CGP’s assets as belonging to CEC, and consider CAC to be CEC’s lender to the extent of the purchase price CGP paid for those assets. While CACQ would have a claim against CEC for the amounts paid to CEC for the assets, it would no longer have ownership and control over the assets to the same extent as it does now.  Moreover, if CACQ’s claim against Caesars Entertainment is considered a financing, there is no guaranty that it will be deemed a secured claim entitled to a priority right of repayment from the assets, rather than a general unsecured claim against the bankruptcy estate that shares pro rata with other creditors in any recovery from the residual value of the bankruptcy estates.

    A bankruptcy court could substantively consolidate the bankruptcy estates of Caesars Entertainment and its debtor subsidiaries with Growth Partners, which would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP.

    Even though CGP has certain bankruptcy remote features that restrict its ability to file for bankruptcy relief, there can be no assurance that a bankruptcy court will not direct CGP’s substantive consolidation with CEC or a subsidiary of CEC in a bankruptcy case of CEC or such subsidiary even if CGP does not itself file a bankruptcy petition.

    The Official Committee of Second Priority Noteholders filed a standing motion in bankruptcy court on May 13, 2016 seeking standing to commence claims on behalf of CEOC's estate and seeks recovery of assets transferred from CEOC alleging claims on behalf of CEOC's estate ranging in value from $8.1 billion to $12.6 billion against all defendants, which included “In the event avoidance or rescission of the Contested Transfers, or any of them, is not practicable, award Plaintiff monetary damages in an amount sufficient to compensate Plaintiffs for the loss of the transferred assets in an amount equal, as to each asset transfer, to the greater of: (i) the value of each such asset transferred as of the date of entry of judgment, or (ii) the value of each such asset transferred as of the date of such transfer.”  Since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely risk is that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the price paid for the transferred assets, rather than being at risk of having the transactions rescinded.   

    CEC and CGP have increased the amount of their contributions to creditors in a potential restructuring numerous times already, and likely will have to offer additional contributions to get to an agreed settlement.  The contributions are currently in the range of the potential damages arising out of claims rated as strong (meaning a high likelihood of success) or reasonable (meaning better than a 50/50 chance of success) estimated by the court-appointed examiner. 

     

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

    Catalyst

    1) Closing the sale of CIE's social and mobile games business, followed by a dividend to CACQ shareholders of CACQ’s pro rata share of the net cash proceeds from the CIE Transaction (net of taxes, expenses, escrow, etc.).  Value of $6.32 per CACQ share: 55% of the current stock price.

     

    2) Reaching consensual agreements with creditors for a restructuring, which would include a CACQ / CZR merger, resulting in CACQ shareholders owning 27% of the post-merger entity.

     

     

    Messages


    Subjectkudos
    Entry08/13/2016 03:09 PM
    Membersocratesplus

    to you alpinist for getting down into the dirt in this very messy situation.  i like dirty and messy legal fights, where value "may" be found.

    before i incur the brain damage to read through all of this and try to find my take, let me ask a short-cirucited question:  is the merit to your thesis here simply that tepper settles, and soon?


    SubjectRe: kudos
    Entry08/13/2016 08:03 PM
    MemberAlpinist

    Thank you, socratesplus.  The thesis is more than just that Tepper/Appaloosa et al settle soon.  Although I do think that the CEC will reach a settlement with the holdout second liens, ultimately by increasing the contribution from CEC to the second liens (CEC has already increased the contribution several times, and will likely have to do so again), but even if there is not a settlement with the holdout second liens, the most likely scenarios still offer an attractive outcome for CACQ, even if CEC is ultimately forced into bankruptcy.  

    Some time ago, the second liens had said they would take $0.60 on the dollar (although they may now want more, given the attractive sale of CIE).  The latest agreement (signed by 37% of the second liens and detailed at the link below) offers the potential for recovery of 55 cents on the dollar.  So the bid/ask spread has gotten narrow enough that it can likely be bridged.  The spread is still hundreds of millions of dollars, but CEC can still offer the second liens more equity in New CEC, among other things.

    One scenario is that CEC seeks to cram down the reorganization plan currently on the table if they can get creditors holding 80% percent of the debt to agree to the plan.  However, Judge Goldgar has made it clear that this is not the path he would prefer to approve.

    A scenario worse for CEC is that they cannot reach a settlement with the second liens, cannot get a cram down approved, and then judgements in pending cases force CEC to also file for bankruptcy protection.  Since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely downside case for CACQ in this case would be that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the prices CGP paid for the transferred assets, rather than being at risk of having the transactions rescinded.  See below for the amounts estimated by the Examiner in his Final Report.

     

    However, the worst case for CACQ would be for all of the above to happen, and for a bankruptcy court to substantively consolidate the bankruptcy estates of CEC and its debtor subsidiaries with CGP, which would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP.

    Some excerpts from the Examiners Final Report that are relevant to considerations of the likelihood of the last scenario (the worst case):

    pg. 29 of the document / pg. 1 of the Introduction: "Monetary damages are the most common remedy in fraudulent transfer cases, but in certain cases the Court could require that the property that was subject to transfer be returned to CEOC, particularly where damages are difficult to calculate."..."If the transferee cannot establish its good faith, the transferee will only be entitled to an unsecured claim for the amount of the consideration it paid. Where good faith is not established and monetary damages are awarded, the damage award thus would be based on the value of the asset transferred and the transferee would not be entitled to an offset in the amount of the consideration."

     

    pg. 47 of the document: "This Report identifies a number of potential fraudulent transfer claims. The remedy for such a claim can include either an order for a return of the property or money damages. In practice, courts most often award damages but that is in part due to the fact that this is the most common remedy sought by plaintiffs. Where valuing an asset is particularly difficult, that is a factor that could cause a court to order return of the property."

    pg. 56 of the document: "Given all of these obstacles, the Examiner believes that the claim based on recovering the full value of CIE is between weak and plausible – it likely would withstand a motion to dismiss, but there is less than a 50% chance of succeeding. A claim limited to the value of CIE attributable to real money online poker is more plausible, though still difficult."

    The Examiner's summary assessment of the Growth transaction is on pages 64 - 70 of the full document (pg 36 - 42 of the Introduction) and of the Four Properties transaction (four casinos CGP purchased from CEC) is on pages 76 - 82 of the document (pg 48 - 54 of the Introduction):

    Re. the Growth transaction, pg. 69 of the document:  "The amount of damages associated with these claims is the deficiency in the amount of the consideration – between $437 million and $593 million. Monetary damages are the most common remedy although as discussed in the Legal Standards Appendix, a court could order return of the properties. Growth also will have to establish that it was a good faith transferee if it is to get the benefit of Bankruptcy Code section 548(c) and obtain a lien for the amount of the consideration it paid ($360 million for the assets), and thus an offset to the value of the property rather than an unsecured claim for that amount. Here, Growth’s agents for negotiating the transaction were the Sponsors who, among other things, knew of the dire financial condition of CEOC, understood there was a risk of bankruptcy and included as part of their goals in this transaction was the enhancement of CEC’s and their position in a restructuring. At the same time, the fact that the transaction only proceeded once a fairness opinion from a reputable investment bank was provided, after genuine bargaining over the price, is important to the assessment of Growth’s good faith. Moreover, the intent of the Sponsors to improve their position vis à vis CEC and CEOC’s creditors may not be attributable to CAC/Growth since there is a reasonable argument that in doing so they were not acting in their capacities as agents of CAC/Growth. There thus is only a plausible argument that good faith will not be able to be established by Growth with regard to this transaction."

    Re. the Four Properties transaction, pg. 82 of the document: "The Examiner believes that the value of these properties at the time of transfer was between $2.4 billion to $2.9 billion, after deducting the Cromwell debt of $185 million. This is between $592 million and $968 million (with a midpoint of $780 million) more than the $1.8 billion purchase price."..."CAC has also argued that it would not under any circumstances pay more than $2 billion and that it was difficult to secure a fairness opinion from Lazard even at that number. The Examiner has found no evidence showing that CAC would have paid materially more than this amount. At the same time, as discussed above, an independent CEOC Board balancing the pluses and minus as of this transaction might have decided not to agree to it if this truly was the maximum price."

     

    Even if CEC loses judgements about the Growth transaction and Four Properties transaction, and is assessed damages of $437 - $593 million for the Growth transaction and $592 - $968 million (midpoint of $780 million) for the Four Properties transaction, CACQ could contribute those amounts via part of its New CEC equity and/or cash, and still generate attractive upside from the current stock price.

     

    Link to latest agreement with the second liens:  https://www.sec.gov/Archives/edgar/data/1575879/000119312516666631/0001193125-16-666631-index.htm

    "The agreement provides all holders of second lien notes with recoveries of at least 46 cents on the dollar based on the midpoint valuation in CEOC’s disclosure statement. The agreement will go effective when the agreement is signed by holders owning greater than 50.1% of the second lien notes under certain of the indentures. The recoveries of those holders of second lien notes who sign the agreement will increase by an additional 4 cents on the dollar when the agreement goes effective and a further 5 cents on the dollar when the agreement gains the support of at least two thirds of the class, or CEOC’s restructuring plan goes effective, bringing the potential recovery to 55 cents on the dollar for all signers of the agreement."


    SubjectRe: Dividend
    Entry08/15/2016 06:26 PM
    MemberAlpinist

    CEC fully understands that CACQ can dividend their pro rata share of the net proceeds from a CIE sale, and the 27% stake already reflects that ability. 

    The initial CEC / CAC merger agreement (from December 2014) gave CAC stockholders 38% of the combined company on a fully diluted basis, and CEC stockholders 62%.  

    Part of the decrease in CAC ownership of New CEC to 27% in the amended merger agreement was due to the earn out adjustment based on CIE’s performance in 2015 (which reduced CAC ownership of CGP from 42.6% to 38.8%), and part of the decrease was in return for the ability to pay a dividend from the net proceeds of a CIE sale.

    The decrease in CACQ’s stake in New CEC increases CEC’s stake in New CEC.  So CEC agreed to the amendment to the merger agreement because that stake (or part of it) can now be used as additional contribution to the CEOC creditors: it increases CEC's options in the negotiations with the creditors.

    The language from the amended RSA is at this link, and is excerpted below:  https://www.sec.gov/Archives/edgar/data/1575879/000119312516644923/d226525dex102.htm

    16. CIE Transaction; CAC Liquidity Transactions.

    (a) Nothing in this Agreement restricts the ability of CAC to effect the sale or other transfer of all or any material portion of the CIE business or assets pursuant to a transaction with an unaffiliated third party (a “CIE Transaction”); provided that, in the event that a CIE Transaction is consummated prior to the Effective Date, the net cash proceeds of such CIE Transaction (net of taxes, transaction expenses and any working capital adjustment, holdback, indemnity payment or escrow for the benefit of the purchaser; provided that the release of any cash escrow prior to the Effective Date will constitute proceeds subject to this Section 16(a)) that are payable to or received by Caesars Growth Partners, LLC (“CGP”) or any of its subsidiaries or affiliates (which for the avoidance of doubt shall not include minority shareholders or employees or members of the management of CAC, CGP or CIE) shall not be distributed (by dividend or other distribution) or otherwise paid to any Person prior to the Effective Date and shall be held separate in a separate account and not comingled with any other cash held by CAC, CGP, CIE or any of their respective subsidiaries or affiliates, other than (i) a distribution (by dividend or otherwise) of such proceeds to CAC or any Subsidiary of CAC in an amount not exceeding CAC’s pro rata share of such proceeds (but subject to the separate account and commingling requirements above), (ii) a distribution to the members of CGP in an amount to pay taxes in respect of such sale and (iii) a distribution or advance to CEC or any of its subsidiaries for the payment of professional fees in an aggregate amount not to exceed $200 million and for the support or advancement of a proposed casino project in South Korea not to exceed $100 million (it being understood and agreed that nothing in this Section 16 will be deemed to constitute CEOC consent to, or preclude CEOC from seeking to enjoin, any CIE Transaction or any distribution, allocation, payment or other use of proceeds therefrom or taking any other action with respect to any CIE Transaction that is necessary to protect the rights of the estates of CEOC and its related chapter 11 debtor subsidiaries). Subject to the terms of the Confidentiality Agreement entered into as of June 10, 2016 by Millco Advisors, L.P. for the benefit of CAC and the CEOC Joinder thereto, CAC will keep the Company updated, on a weekly basis, of the status of and any material developments with respect to potential CIE Transactions and will provide the Company written notice at least 30 days prior to the consummation of any CIE Transaction and during such period will provide the Company such information with respect to such CIE Transaction (including copies of transaction documents) as it may reasonably request.


    SubjectRe: Re: Dividend
    Entry08/17/2016 05:04 PM
    MemberAlpinist

    I should add that I think the reason for adding this ability for CGP to dividend to CAC its pro rata share of the net proceeds if they are received prior to the Effective Date of a Restructuring and CEC/CAC merger was to provide an incentive for all creditors to agree to the Restructuring plan before CGP has received the proceeds from a CIE sale. In that case, all shareholders of New CEC would benefit from all of the CIE net proceeds, rather than just 61.2% of the net proceeds (i.e., following a dividend to CAC of 38.8% of the net proceeds).

    If CEC and the creditors do reach agreement in time for the the CIE proceeds to be received after the Effective Date of a Restructuring and CEC/CAC merger, CAC shareholders will still benefit, but from 27% of the total net proceeds, rather than first receiving 38.8% of the net proceeds, and then benefitting from 27% of the 61.2% remaining net proceeds (which will be received by New CEC).  In that case, the risk from the litigation would be removed, CAC shareholders would receive $4.61 less per share than in the case of first receiving a dividend, and then receiving 27% of the combined company (assuming the merger closes based on the terms in the current RSA), and the CACQ shares would be worth roughly 2.6x today's value.

    The strategy may be leading to progress in the negotiations: it was reported today on Bloomberg that "CEC has made progress in negotiations with dissident bondholders and should have a deal before its operating unit’s disputed bankruptcy plan goes up for a judge’s approval, according to a court-appointed mediator.  The mediator, retired U.S. District Judge Joseph Farnan, made the comments in a report filed late Tuesday in Chicago bankruptcy court.  “There ultimately should be a successful conclusion to the mediation before the conclusion of the confirmation hearing,” Farnan said. “More time is needed to resolve by mediation the complex issues raised.”  Confirmation proceedings are scheduled to begin in January. A deal between Caesars and holdout noteholders would end lawsuits that threaten to put the casino company into bankruptcy alongside its operating unit, which filed for Chapter 11 protection in January 2015."


    SubjectRe: Denial of Extention
    Entry08/29/2016 02:07 PM
    Membersocratesplus

    just a thought from someone who has mediated a fair amount of commercial mediation.

    the mediator generally works with both sides in separate private caucuses to establish for each party a rational valuation model for the dispute and decision-making process.  naturally the parties valuation models may be highly divergent but the decision making tree should be pretty similar.  having a valuation event occur, such as a denial of extension of stay, is actually good for settlement prospects, as it "should" move the settlement valuations closer to each other.  of course, the equity lost this event to the creditors, so the equity valuation should go down, but the counter to that is that the likelihood of settlement "should" go up


    SubjectRe: Denial of Extention
    Entry08/29/2016 07:44 PM
    MemberAlpinist

    Pat,

    Judge Goldgar followed through with his statement from June that the odds of extending the stay “will be slim.”  There are still numerous possible scenarios that could play out, and in all but one of the scenarios, I still think CACQ equity is attractive at these levels, because most if not all of the additional consideration given to the second liens will come from the current CZR shareholders (most likely additional ownership stake in New CEC for the second liens) rather than from CACQ shareholders.

    Today (August 29), Judge Kennelly in the U.S. District Court for the Northern District of Illinois heard the appeal of Friday's ruling on an emergency basis, and granted a temporary extension halting bondholder litigation through September 16.  So the hearing before Judge Rakoff in NYC tomorrow will not happen.  Judge Kennelly apparently said he did not see much chance of success on appeal, but that CEC is entitled to the opportunity to make its case.

    CEC will appear before U.S. District Court Judge Gettleman in Chicago tomorrow.  In October 2015, Judge Gettleman oversaw a previous appeal by CZR about whether Judge Goldgar had the authority to halt the creditor suits, and he sided with Judge Goldgar’s earlier ruling that denied CEC protection from creditor lawsuits by saying about Judge Goldgar’s decision, “the bankruptcy court’s conclusion that debtors are not entitled to an injunction is not erroneous as a matter of law and is not an abuse of discretion.”  At the time, the response from a CEC spokesman was “The district court’s ruling on the stay did not address in any way the merits of Caesars’ position in the New York litigation.  Meanwhile, CEOC’s senior creditors have expressed their support for CEOC’s restructuring plan and the company is continuing its efforts to reach a consensual agreement with junior creditors.”

    More background on the previous decision by Judge Gettleman: http://www.law360.com/articles/712621/caesars-can-t-halt-creditor-suits-against-parent-company

    and here: http://www.wsj.com/articles/judge-caesars-entertainment-must-face-investors-lawsuits-1444329492

    However, CEOC also appealed that decision, and in December 2015, the Seventh Circuit Court vacated Judge Gettleman’s decision and remanded the case to a lower court, saying that Judge Goldgar had the constitutional authority to halt the creditor suits, with the following from the opinion: “The question that the bankruptcy judge and the district judge failed to address because of their cramped interpretation of [the Bankruptcy Code] is whether the injunction sought by CEOC is likely to enhance the prospects for a successful resolution of the disputes attending its bankruptcy.  If it is, and its denial will thus endanger the success of the bankruptcy proceedings, the grant of the injunction would, in the language of [the Bankruptcy Code], be 'appropriate to carry out the provisions' of the Bankruptcy Code, since successful resolution of disputes arising in bankruptcy proceedings is one of the Code's central objectives.”

    More background on that decision is here:   http://www.law360.com/articles/741825/7th-circ-says-caesars-might-be-able-to-halt-creditor-suits

    The question for the court in this appeal is different (i.e., extending a stay vs. the question of Judge Goldgar’s authority to do so), so the outcome may also be different.

    The main scenarios at this point are the following:

    1. Settlement with the second liens before any decisions in the pending lawsuits.  Additional contribution to the settlement will likely involve a larger ownership stake in New CEC, taken from the stake that would have been owned by current CZR shareholders.

    2. No settlement with the second liens before the pending lawsuits, followed by a favorable outcome for CEC, in which case CEC would not have to file for bankruptcy protection.  In that case, I think an agreement either similar to the current RSA or more likely one less favorable for the second liens could become the agreed upon restructuring.

    3. No settlement with the second liens before the pending lawsuits, followed by an unfavorable outcome (or outcomes) for CEC.  If CEC is determined to be responsible for the parent guarantee for all of the debt, it will be forced to file for bankruptcy protection unless they are able to agree to a settlement with the second liens.

    In scenario 3, as I mentioned previously, since rescission of the transfers that established CGP and CAC are most likely not practicable, the most likely downside case for CACQ in this scenario would be that CGP could be held liable for damages in an amount sufficient to compensate Plaintiffs for the loss of value relative to the prices CGP paid for the transferred assets, rather than being at risk of having the transactions rescinded.  The amounts estimated by the Examiner in his Final Report as potential damages (with monetary damages as the most common remedy) were $437 - $593 million for the Growth transaction, and $592 - $968 million for the Four Properties transaction.  Even if CEC loses judgements about the Growth transaction and Four Properties transaction, and is assessed damages in that range, CGP could contribute those amounts via part of its share of proceeds from the CIE sale and/or New CEC equity, and still generate attractive upside from the current stock price.

    However, the worst case scenario for CACQ is still possible: that the litigation moves forward, and a bankruptcy court decides to substantively consolidate the bankruptcy estates of CEC and its debtor subsidiaries with CGP, which would, among other things, allow the creditors of the bankrupt entities to satisfy their claims from the combined assets of the consolidated entities, including CGP.

    I still think the parties are close enough to an agreement that they will be able to come to a settlement without CEC having to declare bankruptcy, but the contribution to the second liens will need to increase for a settlement to happen.  Comments from Judge Goldgar and reports about the potential outcome of the cases in NY and DE suggest that the second liens' negotiating leverage relative to CEC has increased meaningfully, as socratesplus mentioned, Goldgar's decision should increase the likelihood of a settlement, with CEC offering more than they have to date.  But I think the second liens would be better off agreeing to an improved settlement rather than taking what they might get out of a bankruptcy process given the amount of debt ahead of them in the capital structure.


    SubjectRe: Re: Denial of Extention
    Entry08/30/2016 04:16 PM
    MemberAlpinist

    Judge Gettleman today (Aug 30) agreed to extend the stay until Oct. 5 for CEOC to appeal.  Following his decision, parties can appeal to the Seventh Circuit Court.

    http://www.bloomberg.com/news/articles/2016-08-30/caesars-shielded-from-billion-dollar-bond-suits-until-oct-5

    “U.S. District Judge Robert W. Gettleman said he would probably decide at the October hearing whether to overturn the bankruptcy judge, but he warned CEOC that it faced an “uphill” fight.”

     


    Subjectwore me out date
    Entry09/08/2016 02:29 PM
    Membersocratesplus

    hey alpinist, thanks again for sharing your good work on this speculation.

    i say speculation not out of disrespect, as i have toed into it, thinking that all the stakeholders are pros at negotiating hard but not so hard as to let the perfect become the enemy of the good. i would be happy with just good here.

    when i get into something like this, i try to set up a tickler date by which, if something that i am waiting for should have happened but has not happened, then i should seriously consider getting out.  

    correct me if i am wrong, but i might be well advised to set that date for soon, as i dont want to ride an extended litigation in this situation.  

    if you agree with this notion, what would be your "i'm not waiting any longer" date? or why you disagree.


    SubjectRe: wore me out date
    Entry09/09/2016 03:49 PM
    MemberAlpinist

    socratesplus, thank you for your question.  I do not yet have a “I'm not waiting any longer” date. 

    I think about CACQ as an investment in the category of early Warren Buffett-style “workouts,” which he described as “These are the securities with a timetable. They arise from corporate activity - sell-outs, mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or "inside information" pertaining to such developments, but to publicly announced activities of this sort.”  I also consider it an investment with a high probability-adjusted return, where the downside is mitigated by the potential dividend from a CIE sale in the worst case, and which fits the following description from Seth Klarman’s 2015 year end letter: “Our core margin of safety principle also turns out to be more complicated than it may seem on the surface.  Individual investments should be made with a margin of safety in mind.  But sometimes an investment involves a significant possibility of loss but also a very high probability-adjusted return. Where, exactly, would such an investment fall on the Ben Graham scale?  A fiduciary should think more about the safety of an entire portfolio than about any individual holding. Is Baupost willing to make an investment that has a meaningful, even significant probability of loss, if the expected value – the weighted amount and probability of gain and loss – is hugely positive? The answer is yes. All positions involve a degree of risk; any investment can go sour, and any probability assessment can be wrong. We manage the risk of loss in any single position by sizing appropriately based on historical experience as well as by striving for prudent diversification.”

    Some additional details about how I think about the various scenarios and the resulting valuations for CACQ are below.  

    The scenario which would entail a meaningful loss for CACQ shareholders (i.e., 45% downside from today’s price) is for all of the following to occur in succession:

    1) No settlement with the second liens before the pending lawsuits, then

    2) Unfavorable outcome / outcomes for CEC in the pending litigation, where CEC is determined to be responsible for the parent guarantee for CEOC’s debt, then

    3) CEC/Apollo/TPG are still unable to agree to a settlement with the second liens even by offering them all of CZR’s ownership of New CEC (i.e., the CEOC creditors would own the 73% of New CEC, and CACQ would own the agreed upon 27%), which would make current CZR equity—but not CACQ equity—worthless.  CZR would be forced to file for bankruptcy protection, then

    4) A bankruptcy court decides that rather than awarding monetary damages (the most common remedy) from CGP to CEOC, that they will substantively consolidate the bankruptcy estates of CEC and its debtor subsidiaries with CGP, and allow the creditors to satisfy their claims from the combined assets of the consolidated entities, including CGP.  Even if 1-3 above were to occur, as the Examiner said in his report: “Monetary damages are the most common remedy in fraudulent transfer cases, but in certain cases the Court could require that the property that was subject to transfer be returned to CEOC, particularly where damages are difficult to calculate."  

    But if all of scenarios 1-4 occur, assuming the CIE sale closes, CGP in this case will have paid a dividend to CACQ of its pro rata share of the net proceeds from the CIE sale ($6.32 per share), because the proceeds would have been received prior to the Effective Date of a Restructuring and CEC/CAC merger.  There will not be enough time for the litigation to conclude before the CIE sale proceeds will be able to be distributed to CACQ.  The current stay related to the CEOC cases lasts until October 5, and following that decision, parties can appeal to the Seventh Circuit Court before the CEOC case trials are even able to begin.  Subject to customary regulatory approvals and other closing conditions, the CIE sale is expected to close in the third or fourth calendar quarter of 2016.  In this case, Apollo/TPG will want to get some cash out, so CGP will make the distribution to CACQ.

    CACQ’s ownership stake in New CEC in this case would potentially, perhaps most likely, be reduced to zero, which I assume.  So assuming the pending CIE sale closes, the downside in the worst case is $6.32 per share.

    For the inverse cases in scenarios 1-3 above, the considerations for the valuation of CACQ in those cases are the following:

    1) If there is a settlement with the second liens, it may be before CGP has received the proceeds from the CIE sale (in which case all shareholders of New CEC would benefit from all of the CIE net proceeds), or it may be after CGP has received the proceeds and distributed to CAC its pro rata share (38.8%) of the net proceeds (in which case shareholders of New CEC would benefit from 61.2% of the net proceeds), and CACQ will own 27% of New CEC. 

    2) If there is no settlement with the second liens before the pending lawsuits, but there are favorable outcomes for CEC in litigation where CEC is determined not to be responsible for the parent guarantee for CEOC’s debt, then CACQ shareholders will first receive 38.8% of the net proceeds from the CIE sale ($6.32 per share), and they will also own 27% of New CEC.

    3) If there is no settlement with the second liens before the pending lawsuits, followed by unfavorable outcomes for CEC in litigation, but then CEC/Apollo/TPG are able to agree to a settlement with the second liens by offering them monetary damages, perhaps even in the range of $1.029 – 1.561 billion (i.e., the total potential damages estimated by the Examiner in his Final Report for the Growth transaction and the Four Properties transaction), CGP could contribute these damages from part of its proceeds from the CIE sale and/or New CEC equity, which would reduce CACQ’s ownership of New CEC to below 27%.

    Re. the current state of the settlement discussions, note that estimates from August 26 of the gap between the two sides in the negotiation were $900 million - $1.2 billion, and it was revealed in a filing on Sept. 7 that on August 2, CEC made an offer to the second lien noteholders providing a base recovery of 55% (up from a base recovery of 46%, with potential recovery of 55%), to which the second liens responded with a counteroffer which Judge Farnan reported was “not worthy of being relayed.”  At a meeting on August 16, Judge Farnan asked whether Apollo/TPG would fund up to $250 million to reach a “best and final” deal for a 58% recovery, and Judge Farnan was advised that Apollo/TPG would provide the incremental funding.  The second liens did not provide a response to that proposal, and the mediation session ended without agreement.

    Each investor has to assess the probabilities to assign to the likelihood of the outcomes at each step above.  But even if the likelihoods are: 1) 80%, 2) 70%, 3) 70%, and 4) 40%, the combined probability of the worst case scenario ($6.32 per share) is 16%, and the probability-adjusted return is still quite attractive.  I think the likelihoods in each of the scenarios is lower than those probabilities, such that the combined probability of the worst case scenario is <10%.

    The second liens also have to weigh their assessment of the scenarios above, and their likely proceeds in each case, and whether on a probability-adjusted basis they would be better off agreeing to a settlement with an improved contribution, likely in the form of more ownership in New CEC and perhaps with additional cash from Apollo/TPG.  Apollo/TPG/Co-investors’ stake in CZR is at risk of having to all be contributed to the creditors, so their stake in CACQ represents most, if not all, of the proceeds they will generate from their combined investments in the CZR buyout and the $778 million they invested in the formation of CACQ.  So they also have keen incentives to come to an agreement that preserves the value of CACQ.


    SubjectUpdates re. potential dividend from the sale of CIE: 1) amount of net proceeds, and 2) timing
    Entry09/19/2016 08:56 PM
    MemberAlpinist

    Last week, CAC and CEC announced that CAC, CIE, CEC, and CEOC entered into the CIE Proceeds and Reservation of Rights Agreement in connection with the Amended and Restated “CEOC-CAC RSA” and “CEOC-CEC RSA” both dated July 9, 2016, and the Stock Purchase Agreement dated July 30, 2016 for the acquisition of CIE:

    https://www.sec.gov/Archives/edgar/data/1575879/000119312516706910/d233006dex101.htm

    Updates:

    1)  The amount of net proceeds from the CIE acquisition will be larger than I had expected ($7.65 per CACQ share), because CEC will utilize NOLs and other tax attributes generated by CEOC and its subsidiaries to offset gains from the CIE sale, so the amount of net cash proceeds for CGP will be $2.71 billion.  CACQ’s 38.8% stake of those net cash proceeds is $1.051 billion = $7.65 per CACQ share.

    2) Re. timing of a potential dividend: as part of the CIE Proceeds Agreement, CIE has agreed to deposit into an escrow account the CIE Proceeds in excess of the sum of transaction expenses, distribution to minority shareholders of CIE, and certain tax payments.  The “CIE Escrow Term Sheet” details “Permitted CIE Escrow Uses,” and a distribution of the remaining CIE Proceeds that are allocable to CAC or to CGP will only occur on or after the “CAC/CIE Bankruptcy Release Event” when the Caesars Claims are settled, released, or dismissed, or the substantial consummation of a plan of reorganization which provides that CAC, CIE, the Purchaser, and the Acquired Companies are fully and finally released from any liability arising out of or relating to the Caesars Claims against CEC, CAC, CIE etc. in the various pending cases.

    So the CIE sale will most likely close prior to the Effective Date of a Restructuring, but a distribution to CAC of CAC’s pro rata share of the net proceeds will not happen until on or after the "CAC/CIE Bankruptcy Release Event."


    SubjectRe: Updates re. potential dividend from the sale of CIE: 1) amount of net proceeds, and 2) timing
    Entry09/19/2016 09:23 PM
    Membersocratesplus

    re "...but a distribution to CAC of CAC’s pro rata share of the net proceeds will not happen until on or after the "CAC/CIE Bankruptcy Release Event", do you see that as a concession to creditors, meant to induce settlement?


    SubjectRe: Re: Updates re. potential dividend from the sale of CIE: 1) amount of net proceeds, and 2) timin
    Entry09/19/2016 09:37 PM
    MemberAlpinist

    I interpreted it as primarily that they want to avoid a situation where they have made a distribution, but then have a judgment against them which requires them to have to contribute additional funds, when they could have used the CIE proceeds if they had not already made the distribution.  But it also maintains the funds to potentially use in settlement discussions.


    Subjectsponsors up consideration
    Entry09/22/2016 10:34 AM
    Membersocratesplus

            06:20 AM EDT, 09/22/2016 (MT Newswires) -- Caesars Entertainment (CZR), a casino operator, said it has proposed an additional $1.6 billion contribution to second lien noteholders as part of a revised restructuring proposal.

    The company is making the offer with affiliates of Apollo Global Management (APO) and privately-held TPG Capital.

    Caesars said it believes the proposal meets the requirements of the second lien noteholders and is optimistic it will be acceptable.

    The additional contribution will include an estimated $954 million of Caesars Entertainment equity contributed by the sponsors and an estimated $92 million of Caesars Entertainment equity contributed by Caesars Entertainment.

    It would result in the depletion of all of the sponsor-held equity in Caesars Entertainment. It also includes a cash contribution in excess of $100 million by directors and officers through funding by insurance and a reduction in recovery for the first lien creditors valued in the "hundreds of millions of dollars," the company said.

    If the merger of Caesars Entertainment and Caesars Acquisition Company (CACQ) is completed, Caesars Entertainment Operating Company creditors would control more than 62% of the equity of the combined entity.

     

    The revised proposal expires Sept. 23.  

    ******

    my first thought is the drop dead date is meaningless.  what is alternative to sponsors?

    second, i look to alpinist for color, but this seems to make the litigation path for creditors to look like a less promising alternative on a risk adjusted basis


    SubjectRe: sponsors up consideration
    Entry09/22/2016 02:50 PM
    MemberAlpinist

    I also do not think this is really the “best and final” offer, and the second lien’s lawyer Bruce Bennett suggested Wednesday that he thought talks could continue past Friday’s deadline, but CEC’s lawyer Thomas Kreller told the court that the deal “is off the table” once the deadline passes and attorney David Seligman said no deal could mean a "very different reorganization plan for CEOC."  Bennett said in court that despite the “significant additional value” on the table, there is still a “gap” between the offer and what the bondholders believe they are entitled to.  I think they are close enough now that they will come to a settlement rather than continue with battles in court.

    TPG/Apollo would contribute all of their remaining stakes in CZR, so their only continuing ownership in New CEC following the CEC/CAC merger would be as a result of their ownership in CACQ.  Bruce Bennett said an issue for the second liens continues to be Apollo and TPG’s minority stake in post-merger New CEC via their stake in CACQ, and Bennett said “there’s more than enough” value there to make the bondholders happy.  However, TPG/Apollo invested fresh cash to buy their stakes in CACQ, so I am not sure they would also be willing to contribute some of their CACQ stakes.

    The second liens have said it would be unfair for TPG/Apollo to receive liability releases without chipping in to help fund the deal, and Judge Goldgar seems to agree.  But with the latest proposal, TPG/Apollo would contribute differentially more of their CZR stake than the non-sponsor CZR shareholders (actually all of their stakes..), and there would also be a cash contribution of >$100 million by individual directors and officers (albeit it would be funded by D&O insurance).

    The amount of value offered is now more than high end (i.e., $5.1 billion) of the examiner’s estimate of the range of potential damages from claims in the NY and Delaware lawsuits that he considered “reasonable” (i.e., a claim having a reasonable, or better than 50/50, chance of success) or “strong” (i.e., a claim having a high likelihood of success).  The full estimate range of damages was $3.6 - $5.1 billion.  If the proposal is not accepted, CEC can make a strong case to the judge that they made a sincere effort at a settlement and pursue a cram down.

    However, the holders of first lien notes and bank loans have been asked to take smaller payouts as a result of the improved treatment for the second liens, and there is a risk that they may not agree to this reduction.  With the latest contribution now more than the high end of the examiner's estimated range, the calculation for the second liens re. holding out for more vs. taking the deal and shutting down the time clock on the lawyers seems to me to be weighted toward agreeing to the current deal.  A report today on Bloomberg claimed that the second liens have agreed to support the new plan if CEC can get the holders of the first liens and bank loans to agree to the reduction in their recovery.


    SubjectRe: Re: sponsors up consideration
    Entry09/22/2016 03:07 PM
    Membersocratesplus

    but i assume the sponsor proposal would not have included a lesser first lien value unless it was first vetted with them....first rule of negotiation is not to promise something you cant deliver


    SubjectRe: Re: Re: sponsors up consideration
    Entry09/22/2016 03:26 PM
    MemberAlpinist

    I agree.


    SubjectRe: Update for the new deal
    Entry09/27/2016 11:11 AM
    Membersocratesplus

    just read 8k, and it seems there will be no pro rata shareholder dividend.

    one might speculate that this was a give-up required in connection with the creditor negotiation...


    SubjectRe: Re: Update for the new deal
    Entry09/27/2016 09:47 PM
    MemberAlpinist

    Of the two key uncertainties / risks associated with a CACQ investment, one (closing of the CIE sale) has been removed, and the other (reaching a settlement with creditors) is close to being removed (pending formalizing the deal, which then must be approved by the Bankruptcy Court).

    The CIE sale has closed.  CAC released an 8K on Sept. 26 that revealed that on Sept. 23, the sale of CIE’s social and mobile gaming business closed. CIE received $4.4 billion in cash.  Net of management and minority shareholder proceeds, taxes, expenses, etc., $2.71 billion of net CIE Proceeds remains, of which $264,000,000 was placed in escrow for 12 months for potential indemnity claims. 

    CEC/CEOC also announced today (Sept 29) that they have received confirmation from CEOC’s major creditor groups of their support for a term sheet for a consensual chapter 11 plan.  They are working on definitive support agreements and amendments to CEOC’s existing plan of reorganization to reflect the terms outlined in the term sheet, which would qualify as a “bankruptcy release event” as described in the “CIE Proceeds and Reservation of Rights Agreement” from Sept 9:  https://www.sec.gov/Archives/edgar/data/1575879/000119312516706910/d233006dex101.htm.  CIE is holding the CIE Proceeds in an escrow account until the occurrence of certain “bankruptcy release events,” but a “settlement, release or other agreement, in each case that results in CAC, CIE, CEC, Purchaser, the Acquired Companies and their affiliates and Subsidiaries being fully and finally released from any and all Liability arising out of or relating to the Caesars Claims” qualifies as both a “CAC/CIE Bankruptcy Release Event” and a “CEC Bankruptcy Release Event.”

    The CEC equity buyback announced today will use $1.2 billion of CIE Proceeds, and $500 million of CIE Proceeds will be used for OpCo debt reduction on the effective date of the reorganization.  Net of the $264 million escrow, that leaves $746 million of remaining CIE Proceeds, which represents $5.43 per CACQ share.

    The term sheet which summarizes the changes to the Amended Plan and details the equity splits (in Exhibit A) is here:

    https://www.sec.gov/Archives/edgar/data/858339/000119312516720581/d269123dex991.htm

    CACQ’s stake in New CEC has actually increased slightly from the previous plan:

    CACQ Stake in New CEC 7/9 Plan New Plan (9/29)

    Pre-convert CACQ stake (pre-buyback) 27.0% 27.546%

    Fully diluted Equity to Convert upon conversion 12.195% 13.714%

    Fully diluted CACQ stake (pre-buyback) 23.707% 23.768%

    Following the stock buyback (which will use $1.2 billion of CIE proceeds), CACQ shareholders will own 28.174% of New CEC fully diluted for the convert.  

    The non-sponsor public CEC/CZR shareholders (which represent 39.9% of the current CZR market cap) will own 7.131% of New CEC post-buyback and fully diluted for the convert, so the current price of CZR implies an equity value of $6.3 billion for New CEC, a bit higher than the $6.1 billion equity value implied by CACQ’s current price if there is no value assigned to the possible dividend to CACQ holders.  The market is clearly not assigning any value to a potential CACQ dividend.  However, there may still be a dividend to CACQ shareholders of as much as $5.43 per CACQ share (see below).  If there is a dividend of $5.43 per share, then the value of CACQ net of the dividend implies an equity market cap for New CEC of only $3.5 billion.

    Until we see the Revised Plan of Reorganization, we will not know what changes they are assuming to the opening balance for OpCo debt (assumed in the previous Disclosure Statement to be $2.121 billion, not including the convert, which I assume will convert to equity, and the term sheet specified $500 million of CIE proceeds would be used for OpCo debt reduction) or the opening cash balance (previously assumed to be $1.259 billion, net of CIE cash).  But if the assumed opening debt balance is $1.621 billion, and the opening cash balance is $1.259 billion for New CEC, the price of CACQ (assigning no value to the possible dividend) currently implies an enterprise value of just under $6.5 billion for a company projected to do a bit more than $1.5 billion (net of CIE) in EBITDA in 2017 (4.3x EBITDA), and a bit more than $1 billion of EBITDA – Cap Ex (6.5x EBITDA – Cap Ex), so CACQ is trading at a ≥50% discount to its comps (a blend of global and regional casino companies), even if you assign no value to the potential dividend.  If there is a dividend of $5.43 per CACQ share, the EBITDA multiple implied by the CACQ price is only 2.5x, and the implied EBITDA – Cap Ex multiple is 3.8x. 

    Re. the possibility of a dividend, based on the 8K released Sept 26 that details the changes to the amended CGP Operating Agreement (see the end of section 6.9), the remaining CIE proceeds will be treated as a “Partial Liquidation” in accordance with the CGP Operating Agreement.  I am trying to determine how much of these CIE net proceeds can be used as a dividend to CACQ shareholders.  

    The amended CGP Operating Agreement is here:  https://www.sec.gov/Archives/edgar/data/1575879/000119312516719043/d255220dex101.htm

    The original CGP Operating Agreement is here:  http://www.sec.gov/Archives/edgar/data/858339/000119312513407049/d615279dex102.htm

    Based on section 12.2 (Distribution of Liquidation Proceeds), the proceeds from a Partial Liquidation will be applied and distributed in the following order:

    (a) First, to the payment and discharge of all of the Company’s debts and liabilities, whether by payment or the making of reasonable provision for payment thereof;

    (b) Second, 100% to the holders of Class A Units until the aggregate amount distributed in respect of each Class A Unit equals the Class A Liquidation Preference Amount as of the date of such distribution.

    The “Class A Liquidation Preference Amount” is currently $11.29 per CACQ share (which reflects an amount that provides a 10.5% annual IRR based on the “Class A Unit Net Capital,” i.e., $8.64 original capital contribution, reduced by the “Capital Shift Amount” of $0.155, for an adjusted basis of $8.485, compounded at a 10.5% IRR starting November 18, 2013).  So all of the remaining CIE proceeds not used to pay down CGP debt or liabilities will be distributed to CACQ shareholders.

    At June 30, 2016, CGP’s long term debt was $2.261 billion, and current liabilities were $332 million, with a cash balance of $1.033 billion.  However, some of the debt will remain outstanding post-reorganization as PropCo debt: at least the “Cromwell Credit Facility” ($174.6 million face value) and “Horseshoe Baltimore Credit and FF&E Facilities” ($327.3 million face value) were both detailed as PropCo debt in the previous reorganization plan.  I am trying to determine how much of the remaining debt will remain post-reorganization, and how much has to be paid off prior to any distribution to Class A units.

    CGP’s June 30 balance sheet is here:  https://www.sec.gov/Archives/edgar/data/1575879/000157587916000135/cacq-ex991cgpllc3x09financ.htm

    CGP’s long term debt is detailed in Note 7 of CGP’s annual financials here:  https://www.sec.gov/Archives/edgar/data/1575879/000157587916000088/cacq-ex991cgpllc3x09financ.htm

    I will post an update when I determine how much of these CIE net proceeds can be used as a dividend to CACQ shareholders.


    SubjectRe: Re: Re: Re: Update for the new deal
    Entry09/28/2016 08:15 PM
    MemberAlpinist

    The price premium for New CEC implied by CZR relative to the price implied by CACQ is 2.1% at today’s closing prices, but the cost to borrow CZR is 2.3%, so there is not much to be had from the spread at these levels.

    Re. the potential dividend, I spoke with IR, and while there is technically still an ability to make a distribution to CACQ shareholders, and discussions are still ongoing, he thought that it was unlikely a dividend would be paid given the way discussions with the creditors have unfolded.  

    Apollo/TPG wanted to be able to effect a dividend of CIE proceeds to CACQ, which is why they added the ability to the amended RSA signed on July 9, but creditors have been keenly focused on the CIE proceeds as a large and liquid potential source of contribution to their recoveries.  So CEOC on behalf of itself and its creditors pursued the “CIE Proceeds and Reservation of Rights Agreement” signed on Sept 9 in which they agreed not to attempt to enjoin the closing of the CIE sale in return for specifications about the use of CIE proceeds, and the Official Committee of Second Priority Noteholders pursued the “Stipulation Regarding CIE Proceeds” signed on Sept 22 with CAC, CIE, and CEOC in which the Noteholder Committee agreed not to enjoin or block the CIE sale in return for an agreement that there would be no modification to the CIE Proceeds Agreement and that any minority CIE equity holders receiving any CIE proceeds would execute a waiver that agreed their payments could be pursued later by the creditors.

    Even without a dividend, both CACQ and CZR are cheap at these levels, as previously discussed, and the $1.2 billion New CEC stock buyback and $500 million OpCo (New CEC) debt reduction from the CIE proceeds benefit both as future shareholders of New CEC.  

    In addition to the current slight discount for CACQ relative to the implied valuation for New CEC, another benefit for CACQ on the margin relative to CZR is that as the New CEC valuation gap implied by CACQ and CZR closes, there is a bit more leverage in CACQ as the prices of CZR/CACQ increase to fair value because the options vested and expected to vest (which will become increasingly in the money with increases in the stock prices) are larger as a percentage of current common outstanding at CZR (7%) than they are at CACQ (1%).  In addition, RSUs unvested at 12/31/15 were 4.3% of outstanding common at CZR, but only 0.4% of outstanding common at CACQ.


    SubjectRe: Comps/Projections
    Entry10/12/2016 03:20 PM
    MemberAlpinist

    Re. the two parts of your question:

    1) Appropriate Comparables for New CEC and Valuation

    Since New CEC will have a mix of Las Vegas casinos and regional casinos, it is a blend of the global casinos (Wynn Resorts, MGM Resorts, Las Vegas Sands), which are trading between 12.5x - 15.5x LTM EBITDA (average of 14.1x), and regional casinos (Pinnacle Entertainment, Boyd Gaming, Eldorado Resorts, Isle of Capri Casinos, and Penn National Gaming) which are trading between 7.3x - 8.7x LTM EBITDA (average of 8.0x).  Note that Eldorado Resorts announced an agreement to acquire Isle of Capri Casinos on Sept 20, 2016.

    MGM and Pinnacle Entertainment have both sold casino real estate to REITs.  Penn National Gaming started the first casino REIT with the spin-off of Gaming and Leisure Properties (NASDAQ:GLPI) in November 2013 which separated its gaming operating assets from its real property assets, and in April 2016, GLPI also acquired substantially all of Pinnacle Entertainment's real estate assets.  

    MGM contributed to MGM Growth Properties (NYSE:MGP, priced its IPO in April 2016) the real estate assets of six casino resorts on the Las Vegas Strip (Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor and Excalibur), four regional casino resorts (MGM Grand Detroit, Beau Rivage and Gold Strike Tunica, both in Mississippi, and Borgata in Atlantic City, purchased after the IPO in May 2016), and The Park, a Las Vegas dining and entertainment complex which opened in April 2016.  MGM transferred 100% ownership interest in such subsidiaries to MGM Growth in exchange for Operating Partnership units in MGP.  MGM did not contribute Bellagio, MGM Grand Las Vegas, or Circus Circus Las Vegas.

    So the closest comps for New CEC are arguably a blend of MGM and Penn/Pinnacle (average LTM EBITDA multiple: 9.9x).

    The remaining CIE business owned by New CEC is an extremely high margin licensing business that I believe should be valued separately from the casinos.  I project it will do $86 million in 2017 revenue (see below), almost all of which drops to EBITDA.  

    But even if you value the CIE EBITDA using the same comparable multiple as the EBITDA from the casinos (for an added margin of safety), CACQ would need to trade over $31 per share (2.4x the current price) for the implied valuation of New CEC to be at 9.9x EBITDA.

    The geographic breakdown for the Global Casino Companies for 2015 Revenue and EBITDA (2013 for CZR: most recent breakout) was the following:

    Revenue by Geography 2013         2015         2015              2015

                                           CEC           MGM         Wynn               LVS

    Las Vegas                       37%             62%            40%               6%

    Regional                          54%            12%              5%               0%

    Managed/International    8%                0%             0%                0%

    Macau                               0%             26%            60%             62%

    Singapore                          0%                0%             0%             27%

                                           100%          100%          100%            100%

     

    EBITDA by Geography  2013              2015              2015             2015 

                                           CEC                MGM             Wynn             LVS

    Las Vegas                       49%                  63%               40%              7%

    Regional                         49%                  13%                 0%               3%

    Managed/International     2%                   0%                 0%               0%

    Macau                               0%                  24%              60%             53%

    Singapore                          0%                    0%                0%              36%

                                          100%              100%              100%            100%

    Note that for CEC, I used 2013, which is the last time CZR broke out its Regional Operating Results.  Since then, the transactions that moved casinos among subsidiaries resulted in a mix of casinos in Las Vegas and outside of Las Vegas for the CEC subsidiaries, and they do not break out the individual casino performance.  Since 2013, I think CEC’s Las Vegas properties have outperformed the regional casinos, so New CEC’s EBITDA mix should now be more heavily weighted than 49% in Las Vegas.

    CEC Casinos:

    • CERP Casinos: 

         o   In Las Vegas: Flamingo Las Vegas, Harrah’s Las Vegas, Paris Las Vegas, Rio All-Suites Hotel & Casino 

         o   Outside of Las Vegas: Harrah’s Laughlin (NV), Harrah’s Atlantic City 

    • CGP Casinos: 

         o   In Las Vegas: Bally’s Las Vegas, The Cromwell, The LINQ Hotel & Casino, Planet Hollywood Resort & Casino

         o Outside of Las Vegas: Harrah’s New Orleans, Horseshoe Baltimore 

    • CEOC Casinos: 

         o   In Las Vegas: Caesars Palace, Hot Spot Oasis

         o   Outside of Las Vegas: Showboat Atlantic City, Bally’s Atlantic City, Caesars Atlantic City, Harrah’s Philadelphia, Harrah’s Reno, Harrah’s Lake Tahoe, Harveys Lake Tahoe, Harrah’s Joliet, Horseshoe Hammond, Harrah’s Metropolis, Horseshoe Southern Indiana, Harrah’s Council Bluffs, Horseshoe Council Bluffs, Horseshoe Tunica, Harrah’s Tunica, Tunica Roadhouse Hotel & Casino, Grand Casino Biloxi, Harrah’s North Kansas City, Harrah’s New Orleans, Louisiana Downs, Horseshoe Bossier City, International (primarily UK) and Managed Casinos.

     

    2.  Reasonableness of Projections for New CEC

    The projections for New CEC from the Disclosure Schedule are also in this 8k:

    https://www.sec.gov/Archives/edgar/data/858339/000119312516605797/d196895dex991.htm

    along with the following summary:  “The projections contained below (the “New CEC Projections”) represent projections for the CEC entity post-merger and emergence (“New CEC”). The New CEC Projections were developed by CES management with input from CAC, CEOC, and others during the annual budgeting cycle in late 2015 and are consistent with the 2016 annual plan and corresponding long range plan. All projections used for OpCo are consistent with those prepared by the Debtors and contained in Exhibit E. These projections do not incorporate any impact or adjustments to projections based on current 2016 year-to-date performance. Additionally, the projections reflect management’s judgment (at the time the projections were prepared) of future operating and business conditions, which are subject to change. Although management believes the assumptions disclosed herein to be reasonable, it is important to note that management can provide no assurance that such assumptions are realized. Projections include a range of outcomes. For this discussion, management has included projections which we believed, at the time of preparation in late 2015, to be the most likely case. We have not included nor do we anticipate including the associated ranges.”

    “Adjusted EBITDA is determined on a basis consistent with CEC and CAC periodic earning releases. Management believes that Adjusted EBITDA provides investors with additional information and allows an understanding of the results of operational activities separate from the financial impact of decisions that may be made for the long-term benefit of New CEC. For more information on this non-GAAP measure, how it is calculated and why it is used, please refer to CEC’s periodic earnings releases.

    Adjusted EBITDAR is Adjusted EBITDA further adjusted to remove the effects of projected rental payments to PropCo. Management believes Adjusted EBITDA will be useful to investors following CEOC’s reorganization, as New CEC will have substantial rental obligations that investors could view as a form of financing expense when attempting to compare New CEC results to prior CEC, CEOC, or CAC results.

    The New CEC Projections have been adjusted to exclude the ownership percentage attributable to partners and management interest in CIE, Horseshoe Baltimore, and Punta del Este. As such, the projections are reflective of actual ownership economics based on current ownership percentages. Further, the projections will not match GAAP financial statements because they do not follow GAAP consolidation rules. The ownership percentage assumed for CIE is fully diluted based on the treasury method.”

    New CEC Operating Projections

                                                            2017                2018                 2019                2020

    New CEC Net Revenue                   9,196               9,620               10,053             10,468

    New CEC Adjusted EBITDAR           2,512               2,712                 2,906               3,076

    PropCo Rent                                       -640                 -643                  -647                 -650

    New CEC Adjusted EBITDA             1,872               2,069                2,259                 2,425

    Adjusted EBITDAR Margin               27.3%               28.2%              28.9%              29.4%

    Adjusted EBITDA Margin                 20.4%               21.5%              22.5%              23.2%

     

    New CEC Operating Projection Assumptions

    The following assumptions were considered in developing the operating projections:

    1. Adjusted EBITDA

    Definition of Adjusted EBITDA is consistent with the calculation used in CEC and CAC earnings releases.

    2. Organic Market Growth:

    Organic top line growth assumption ranges from 2.0% – 3.0% across New CEC’s portfolio. Key drivers are disposable income, wage growth, and household income with the growth assumption based on expected Federal Reserve targeted inflationary growth rate of 2.0%. Management has included a 50bps premium for regional markets with more favorable market conditions and 100bps premium for the Las Vegas market.

    3. Cost Structure:

    The projections assume fixed cost increases of approximately 1.75% per annum during the projection period, driven by anticipated pressure in certain areas including wages, benefits, property taxes, cost of sales, and insurance. No cost savings initiatives have been assumed to offset these headwinds.

    4. Return on Invested Capital:

    Projections contemplate renovation of hotel room product at many of the Company’s Las Vegas properties during the period forecasted including Caesars Palace, Harrah’s Las Vegas, Paris Las Vegas, Flamingo, Planet Hollywood and Bally’s Las Vegas. All returns are assumed to begin after the respective projects’ completion dates. Organic growth rates capture capital expenditures required to maintain the current competitive positioning of the facilities.

    5. Competitive Impacts:

    The New CEC Projections take into account the opening of Live! Hotel and Casino in Philadelphia and MGM National Harbor in Baltimore. However, the impact from potential legislation changes to permit gaming in new jurisdictions has not been contemplated due to the highly speculative and binary nature of such decisions.

    6. Other Assumptions

    • No material acquisitions or divestitures;

    • No new development projects. Although development prospects are regularly evaluated by management, the projections do not include any expenses or associated returns due to the speculative nature of such prospects. One previously disclosed prospect management is evaluating is South Korea;

    • Continuation of CES Shared Services Agreement;

    • PropCo options to acquire Harrah’s Atlantic City, Laughlin or New Orleans are not exercised.

     

    My Commentary

    Since these projections included CIE’s Social and Mobile Games (SMG) business, an estimate for the SMG business should be deducted to get to an EBITDA estimate for New CEC.  

    On Sept 29, CEC released pro forma financials for 2013 – June 2016 for “Pro Forma CEC Consolidated” financials excluding the CIE SMG business, with CEOC deconsolidated in 2015-2016, and CEOC Financials for 2015-2016 are released monthly in the “Monthly Operating Report” filed with the Bankruptcy Court.

    The New CEC projections assumed “Organic top line growth assumption ranges from 2.0% – 3.0% across New CEC’s portfolio” including the CIE SMG business.  Actual revenue and growth rates for the first half of 2016 including the CIE SMG business were the following:

    Revenue          6 mo '15        6 mo '16       Growth

    CEOC                1,950              1,952            0.1%

    CERP                 1,095              1,090           -0.5%

    CGP Casinos       780                 840             7.7%

    CIE                  362.8              477.2            31.5%

    Total                  4,188              4,359              4.1%

     

    Actual revenue and growth rates for the first half of 2016 excluding the CIE SMG business were the following:

    Revenue             6 mo '15           6 mo '16           growth

    CEOC                    1,950                1,952                0.1%

    CERP                    1,095                1,090                -0.5%

    CGP Casinos          780                   840                 7.7%

    CIE net of SMG       20                     22                   9.1%

    Total                    3,845               3,904                   1.5%

     

    The historic financials for CIE’s SMG business and my projections (based on a slight discount from recent growth rates) are the following:

    CIE SMG         2014     2015     LTM      2016E         2017E

    Revenue          549.1     725        838          954           1,240

    y/y growth         81%     32%      31%         31%            30%

    EBITDA              NR       243        282          321              418

    EBITDA %                    33.5%     33.7%     33.7%        33.7%

     

    The New CEC Projections were adjusted to exclude the ownership percentage attributable to partners and management interest in CIE (i.e., 24%), so I subtract 76% of the SMG EBITDA projection (i.e., $318 million) and 76% of an EBITDA projection for rest of CIE (i.e., $37 million) from the projection for New CEC Adjusted EBITDA ($1.872 billion) to arrive at $7.91 billion in 2017E implied revenue projection for the casinos net of the CIE business, and $1.52 billion for the implied EBITDA projection for the casinos:

                                                                             2017E

    New CEC Net Revenue                                      9,196

    New CEC Adjusted EBITDA                                1,872

     

    New CEC Revenue net of All CIE Revenue     7,907

    New CEC EBITDA net of All CIE EBITDA        1,517

     

    The historic financials for the CEC Casinos and my projections (based on recent growth rates) are the following:

    Casino

    Revenue        2013      2014     2015      LTM      2016E     2017E

    CEOC              4,985    4,812     3,918    3,919      3,896       3,900

    CERP               1,979    2,065     2,154    2,149      2,165       2,197

    CGP Casinos     1,040   1,281     1,579    1,639      1,700       1,831

    Total Casinos  8,004   8,158     7,651    7,707      7,762       7,928

     

    Casino Property

    EBITDA          2013       2014       2015       2016E       2017E

    CEOC              1,063         816       1,162        1,195        1,196

    CERP                 530          520         672          691          702

    CGP Casinos       248         265         376          460           495

    EBITDA          1,841       1,601       2,210       2,346       2,393

    So my projection for 2017E revenue for the casinos net of CIE is close to the implied revenue projection for the New CEC casinos net of CIE (although I note that if management’s late 2015 projection for CIE’s performance was lower or higher than mine, the implied Revenue and EBITDA projections for the casinos net of CIE’s business would be correspondingly higher or lower than mine).  The New CEC EBITDA projection net of CIE also looks reasonable based on the disclosed Property EBITDA for the casinos. 

    The remaining CIE business owned by New CEC is an extremely high margin licensing business that I believe should be valued separately from the casinos (as discussed above).  I project it will do $86 million in 2017 revenue, almost all of which drops to EBITDA, comprised of the following:

    • IP licenses for the WSOP and WSOP-related trademarks for use in Playtika's social and mobile games for a 3% royalty on net revenues of CIE’s SMG business.  

       o   The SMG business annual run rate in Q2 2016 (ending June 2016) was $950 million, so the 3% royalty was worth $28.5 million annually in Q2.

       o   This royalty should generate $37-38 million for CIE in 2017, with an annual growth rate in the range of 30%, all of which drops to EBITDA.

    The rest of CIE should generate $49 million in 2017 revenue, growing roughly 9% y/y.

    • Software license agreements with 888 Atlantic Limited and NYX Gaming Group for three regulated online real money gaming websites in New Jersey that use and promote the Caesars, Harrah's and WSOP brands: CaesarsCasino.com, HarrahsCasino.com and WSOP.com.  888 provides front and back office services for CIE's U.S. poker offerings, allowing CIE to focus on its strengths in branding and marketing, including the online acquisition and retention of customers. CIE operates WSOP.com in Nevada and WSOP.com and HarrahsCasino.com in New Jersey on 888's platform, and operates CaesarsCasino.com in New Jersey on the NYX casino platform.  NYX provides front and back office services on its software platform in New Jersey in exchange for a share of net gaming revenue for the Caesars Casino brand.

    • CIE also markets the WSOP brand through three avenues: 

       o   Live Events. annual WSOP Las Vegas at the Rio Las Vegas and WSOP-branded Circuit Events, with WSOP Las Vegas carried on ESPN and ESPN2 through at least 2017 (current contract). 

       o   Licensing.  WSOP brand licensed for consumer products (playing cards, poker chips, lifestyle apparel) sold at retailers (e.g., Target, Lids).  NJ runs a lottery with the WSOP brand and eight states have sold WSOP branded instant-win lottery tickets since 2009.  CIE also licenses the WSOP trademark to 888 for their use in 888's operation of WSOP.co.uk (regulated online real money gaming website in the UK). In addition, CIE licenses the Caesars trademark to Gamesys for use in the operation of UK online real money gaming websites, CaesarsCasino.co.uk and CaesarsBingo.co.uk.

       o   Sponsorships. Promotional partnerships with a variety of brands, which typically include rights fees and marketing activities promoting the WSOP brand. Event sponsors in 2015 included NJOY, Jostens, Black Clover, GPI and 888poker. CIE has the exclusive rights to sell camera-visible brand placements within its television and live Internet broadcast programming to third-party advertisers.


    SubjectRe: Re: Comps/Projections
    Entry10/13/2016 05:25 PM
    Memberjwilliam903

    Thank you for the detailed response - very helpful.  I agree with your assesment of the comps.  When I look at the New CEC projections in the 8K link above, I see that the cap structure differently than how you presented it in the writeup.  It looks to me like the the CERP debt and CGP debt (and assets) are not going to the propco at least initially and are staying with New CEC.  Isn't the initial debt in the propco from the non-equitized CEOC estate?  So I guess I see the cap structure as follows...  

    CACQ:

    - $12.81 * 137MM shares represents 28.174% of New CEC (so a $6.2B market cap) post buyback and conversion of the New CEC converts.  Add to that $1.235 in Opco first lien term loans (the second liens went to zero in the latest amendment), $385MM in chester/clark/leases and subtract $500MM for the "CIE deleveraging proceeds".  Add in $6.5B in debt from CERP and CGP and another ~$300MM from Cromwell and Baltimore.  This adds up to roughly $7.889B of debt and then subtract pro forma cash of $1.442B (opening balance of  $1.349B +745MM in CIE proceeds + $264MM in CIE proceeds in escrow -$925MM for "new CEC cash distribution" to debtors).  This implies the entity is trading at 8.2x the $1.5B of EBITDA.  At 10.5x, I see a $20 stock for CACQ.  I'm trying to confirm the many moving and confusing parts but given CGP and CERP will intially be part of New CEC EBITDA, not sure why the debt shouldn't be included.  Thanks.

     


    SubjectRe: Re: Re: Comps/Projections
    Entry10/16/2016 08:23 PM
    MemberAlpinist

    Good question.  My assumption about the $2,121m of debt being the only debt transferred to New CEC rather than the REIT / PropCo was based on the diagram on page 17 of the Revised Disclosure Statement from 6/28/16 (link and image below), which provides detail on the post transaction debt and where it will reside, which they describe as “The following illustrative organizational chart summarizes the organizational structure of the reorganized entities, including their new capital structure, on the Effective Date,” and shows only the $2,121m of debt at OpCo under New CEC.  In addition, the projected balance sheet for OpCo on page 956 of the Disclosure Statement is consistent with the diagram and has only the $2,121m of debt at OpCo, and the high end of the potential range of debt shown in the diagram for PropCo (i.e., $5,467m - $6,750m) roughly corresponds to the amount of debt outstanding at CERP and CGP ($6,769m).

    https://cases.primeclerk.com/CEOC/Home-DocketInfo?DocAttribute=1284&DocAttrName=PLANDISCLOSURESTATEMENT 

    However, I realized the $2,121m was just the debt from CEOC going to New CEC (this amount was updated in the latest amendment to $1,621m prior to the $500m debt reduction), and you are correct that the debt from CERP, CGP, Cromwell, Baltimore will also be on New CEC’s balance sheet.  The amounts shown in the 8k for CERP and CGP debt are the same as the existing debt for each of them.  My apologies.  

    Some clarifications for current Projected Debt, Projected Cash, 2017 EBITDA, and the valuation are below. 

    1) Projected Debt Balance

    New CEC’s Projected debt on 1/1/17 is now:

    Projected Debt (M)   1/1/17

    CEOC OpCo                             1,621 (see below)

    CEOC OpCo debt reduction     (500)

    CERP                                        4,614

    CGPH                                       1,848

    Cromwell                                    175

    Baltimore                                    132

    Parent (Convert)                             0 (assuming conversion to equity)

    Total                                         7,890

    CEOC OpCo’s outstanding debt will be the following:

    CEOC OpCo

    First Lien Notes                          1,235

    Second Lien Notes                            0

    Chester Downs Notes                  330

    Clark County Bonds                        44

    Capital Leases / Other                   12

    Total                                            1,621          

    CEOC OpCo debt reduction         (500)

    Net CEOC OpCo debt                  1,121

    The Second Lien Notes were removed in the latest amendment.  The CEOC OpCo First Lien Notes represent newly issued notes that will be syndicated to third parties for cash, which will then be distributed to fund creditor recoveries for the First Lien Bank Debt and the First Lien Notes.  To the extent that CEOC is unable to syndicate the entirety of the new OpCo debt, the Plan contemplates OpCo issuing new debt directly to the creditors, for which New CEC will provide a guarantee.

     

    2) Projected Cash Balance

    The net proceeds from the CIE sale are reflected in the pro forma financials released on Sept 29, and are described in Note 2 here:

    https://www.sec.gov/Archives/edgar/data/1575879/000119312516725915/d271960dex991.htm

    The June 30 pro forma balance sheet shows an increase in cash of $124.5 million (from CIE’s cash balance) and an increase in Restricted Cash of $3,047.5 million (which includes $264 million in escrow), which represents the $4.4 billion received from the CIE sale, net of deductions for (i) transaction expenses ($57.9 million vs. previous estimate of $65 million), (ii) amounts paid to CIE’s minority shareholders, including CIE management and Rock Gaming, LLC and (iii) appropriate Taxes (currently estimated to be $266.0 million vs. previous estimate of $300 million).

    The previous New CEC projections assumed an opening cash balance of $1,359 million (including a projection for CIE’s cash balance: $124.5m based on the cash increase the pro forma financials). 

    So if there is no dividend to CACQ shareholders from the CIE proceeds before the Effective Date, the cash available to New CEC will be the following: 

    Previous Assumed Opening Cash Balance     1,359.0    (includes CIE cash balance)

    Restricted Cash Increase                                3,047.6    (includes $264 million in escrow)

    Pending CEC Payments                                   (285.0)    (will occur after 60 days)

    Assumed Cash + CIE Net Proceeds                4,121.6    (net of pending CEC payment)

     

    New CEC buyback                                          (1,200.0)

    Incremental “New CEC Cash Contribution”      (519.2)   (includes OpCo debt reduction)

    Remaining CIE Cash                                     2,402.4   (including $264 million in escrow)

    Note that the $519.2 million incremental “New CEC Cash Contribution” (i.e., the increase from $406m to $925.22m now) includes the $500m CIE OpCo Deleveraging Proceeds and $19.22m for the Unsecured Creditor Cash Pool, and is incremental to the amount previously assumed in the projected $1,359m opening cash balance.

    The updated amount for the “CEC Special Distributions” ($285m, increased from $250m) is described in the 2nd amendment to the CGP LLC Agreement here:

    https://www.sec.gov/Archives/edgar/data/1575879/000119312516734030/d243506dex102.htm

     

    3) EBITDA

    The $1.52 billion 2017 EBITDA estimate is for just the casinos.  Including the remaining CIE business (WSOP and Online Real Money Gaming, and the CIE SMG 3% net revenue royalty), my 2017 EBITDA estimate is just over $1.6 billion.

     

    4) Valuation

    CACQ at $12.71 implies a $6.2 billion fully diluted market cap for New CEC.  Based on the debt and cash above, that values New CEC at 7.3x 2017 EBITDA.  Still cheap, albeit not as cheap as I had thought. 

    CACQ at $21.50 would value New CEC at 10.0x 2017 EBITDA (69% upside from current price).  At $23.41 (84% upside from current price), it would value New CEC at 10.6x 2017 EBITDA (a weighted blend of the multiples of MGM and PENN/PNK that takes into account that MGM gets 13% of its EBITDA from Regional casinos).


    SubjectRe: Re: Re: Re: Re: Comps/Projections
    Entry10/18/2016 08:51 AM
    Memberjwilliam903

    Thanks for the response.  That chart is definitely misleading. 

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