CAESARS ENTERTAINMENT CORP CZR
September 11, 2013 - 2:56pm EST by
Astor
2013 2014
Price: 26.25 EPS -$6.60 -$4.50
Shares Out. (in M): 125 P/E NA NA
Market Cap (in M): 3,292 P/FCF NA NA
Net Debt (in M): 23,200 EBIT 775 1,150
TEV: 26,492 TEV/EBIT 34x 23x

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  • Highly Leveraged
  • Gambling
  • Hotels
  • Rights Offering
  • Short squeeze
  • Off Balance Sheet Liabilities
 

Description

I am recommending a long position in CZR with a price target of $38 in the next 1-2 months. I believe CZR is severely misunderstood and very poorly analyzed, so much so that the recent move in the stock has simply confounded people. Not only is the recent move justified, in my opinion, there is more to go. Here is why I believe the stock will trade to $38 in the short term:

 

CZR is a very out of consensus idea. It is heavily shorted (almost unborrowable at this point), every analyst that covers it either has a hold or a sell rating and the shorts are constantly in the press, pitching it as a bankruptcy candidate. Not only do I think CZR is not going bankrupt, I believe there is significant upside in the stock.

 

The reasons to dislike CZR are obvious. It is levered over 12x EBITDA, they burn almost $500M in cash/year and they have a 2015 $4.5B maturity that the shorts believe they can’t get past. It is easy to believe that there is no equity value under all this debt so CZR is not only technically bankrupt, it will run out of cash in 3 years. None of that will matter, according to the shorts because CZR won’t be able to refinance its $4.4B PropCo CMBS maturity for 2/15, which will push the company into bankruptcy even earlier.

 

I believe this thought process to be very wrong. One cannot look at CZR as one levered company. It has many component parts that are in fact bankruptcy-remote to each other. There is a HoldCo, a PropCo, an OpCo and now a SpinCo. CZR is spinning off (through a rights offering) many interesting and attractive properties into CAC (Caesars Acquisition Co). This company will trade under the ticker “CGP”. It will be very under-levered, generate a lot of cash, and will be CZR’s growth vehicle. It will be a very attractive stock to own and at the rights offering price of $9.43/share, I believe very cheap.

 

The entire PropCo structure has traded up significantly in the last few weeks as Debtwire is reporting that CZR is in the market to refinance this entity. I believe this process will soon be finished and take near-term bankruptcy risk off the table. The next time the company will have potential issues is going to be 2017 (3 years away). But I believe even that is fixable.

 

PropCo currently has $4.4B of debt and will do about $515M of EBITDA in 2014. I believe that this debt burden will be reduced to $4B through negotiation and improving the collateral pool at PropCo (I would explain further but then it would become a very long pitch. Once you start to work on this, it is easy to see how this is possible). The refinanced structure will have many component pieces probably, including a PIK note (possibly) so that while PropCo credit doesn’t trap real liquidity in the structure, it accretes value while CZR doesn’t de-lever. I believe the blended rate on this structure will be about 7% and PropCo is worth about $8.5/share.

 

PropCo

 

EBITDA

515

Interest

(280)

CapEx

(85)

  Free Cash Flow

150

Multiple

7.0x

Equity Value

1,050

Equity Value/share

$8.4

 

Further there is cash and some receivables at HoldCo worth about $3.75/share. Together PropCo & HoldCo are worth about $12/share.

 

This brings us to OpCo, the ugly stepchild. OpCo is levered 13x EBITDA and arguably drains equity value from the rest of the entities. I believe this is incorrect. There is a set of parent guarantees at OpCo that link it to the rest of the entities. However, these guarantees can be removed, making OpCo its own animal. OpCo could be worth zero but I don’t believe it has negative value to CZR.

 

The Parent guarantee reads:

 

In addition, the Parent Guarantee is automatically released upon the election of the Issuer and notice to the Trustee if the guarantee by Caesars Entertainment of the Credit Agreement, the Existing Notes or any other Indebtedness which resulted in the obligation to guarantee the Notes has been released or discharged.

Definitions:

“Existing Notes” means the Issuer’s 5.375% Senior Notes due 2013, 5.625% Senior Notes due 2015, 6.500% Senior Notes due 2016, 5.75% Senior Notes due 2017, 10.75% Senior Notes due 2016 and 10.75%/11.50% Senior Toggle Notes due 2018.

“Credit Agreement” means (i) the credit agreement, dated as of January 28, 2008, entered into in connection with the consummation of the Acquisition, among the Issuer, the pledgors named therein, the financial institutions named therein, and Bank of America, N.A., as Administrative Agent and Collateral Agent, as amended, restated, supplemented, waived, replaced (whether or not upon termination, and whether with the original lenders or otherwise), restructured, repaid, refunded, refinanced or otherwise modified from time to time, including any agreement or indenture extending the maturity thereof, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement or agreements or indenture or indentures or any successor or replacement agreement or agreements or indenture or indentures or increasing the amount loaned or issued thereunder or altering the maturity thereof and (ii) whether or not the credit agreement referred to in clause (i) remains outstanding, if designated by the Issuer to be included in the definition of “Credit Agreement,” one or more (A) debt facilities or commercial paper facilities, providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose entities formed to borrow from lenders against such receivables) or letters of credit, (B) debt securities, indentures or other forms of debt financing (including convertible or exchangeable debt instruments or bank guarantees or bankers’ acceptances), or (C) instruments or agreements evidencing any other Indebtedness, in each case, with the same or different borrowers or issuers and, in each case, as amended, supplemented, modified, extended, restructured, renewed, refinanced, restated, replaced or refunded in whole or in part from time to time.

 

I believe the easiest way for CZR to remove the parent guarantees is to pay down or refinance the “Existing Notes” or Senior Unsecured Notes. These are $2.1B worth of paper trading at 70 cents. CZR already owns $1.1B of this paper and is contributing it to CAC so they only need to get rid of another $1B worth. With $1.8B of cash, $1B of potential new debt capacity, $800M of cash coming in from the Macau land sale and the CGP rights offering, CZR has plenty of liquidity to remove the guarantee from OpCo. (While I believe the guarantee language is clear, it is a good idea to get legal advice on it when you begin doing serious work)

 

This completely makes OpCo bankruptcy-remote to the rest of the structure, allowing us to value the other businesses separately. However, even though OpCo can’t mess things up, there are plenty of interesting assets at OpCo. I believe after removing the guarantee CZR will go to the 2nd liens, who will sit under 7x of debt ($5.5B of paper at 10%, trading at 60 cents) and negotiate with them to equitize their stake. Since there is a high likelihood that the 2nd liens wont be the fulcrum security in bankruptcy, it is in their interest to negotiate with CZR to get a piece of the now, very interesting equity. Not only will this move de-lever OpCo significantly, it will allow OpCo to generate cash and de-lever naturally, making the equity position very attractive. I believe the market is totally missing CZR’s ability to restructure their debt in this manner. (I am happy to lay out what I think this deal will look like and why the 2nd liens would do it but again, it would make for a really long writeup right now)

 

There is potentially lots of value at OpCo but for now, let’s just assume that it’s worth zero and move on to CAC. CZR (sometime in the next 4 weeks probably) will do a rights offering to give its shareholder the rights to purchase 1 share of CAC for every share of CZR they hold.

 

The Sponsors (who own 70% of the equity) have committed to excersising $500M worth of rights. There will be a pro-rata over-subscription for un-exercised rights. For our purposes, we will assume that all the rights will be exercised by someone. Post the offering, CZR will own 57% of CGP and CAC (publically owned piece) will own 43%.

 

Here are the assets that will sit in CGP:

 

Planet Hollywood Casino & 50% of the management fee of PH

Horseshoe Baltimore Development & 50% of the management fee of HB

$1.1B of CEOC (OpCo notes, yielding over 9% at contributed value)

Over $900M of cash

Caesars Interactive Entertainment (CIE)

 

CAC will have 125.4M shares outstanding (recall that this will be 43% of the ownership of CGP)

 

Here’s what I think these assets are worth:

 

   

Metric

Amount

Multiple

Debt

Owned

Equity

Discount

PV/ Fair Value

Planet Hollywood

2014 EBITDA

90

10.0x

515

100%

385

 

385

PH Management Fee

2014

18

15.0x

0

50%

135

 

135

Horseshoe Baltimore

2016 EBITDA

100

8.0x

365

52%

226

80%

181

HB Management Fee

2016

15

15.0x

0

50%

113

80%

90

CEOC Notes

   

1,100

   

100%

1,100

68%

748

Cash (will be deployed accretively)

 

950

1.5x

 

100%

1,425

70%

998

CIE (ex real-money online gambling)

2014 EBITDA

85

12.0x

50

75%

728

 

728

real-money online gambling (to be discussed later)

       

 

 

 

  Total

           

4,111

 

3,264

CAC Share (43%)

         

1,768

 

1,404

Per Share of CAC

         

$14.1

 

$11.2

                   

CZR Share (57%)

         

2,343

 

1,860

Per Share of CZR

         

$18.7

 

$14.8

 

Real-money online gambling is a key part of the thesis here and there are varying views on how big this market will be. One thing to remember here is the CZR has about 30% share of the total gaming market in the U.S. and with their partner 888, they will be a formidable force in this market and are set up to be the market leader. I would recommend reading some of the Morgan Stanley pieces on market sizing.

 

CGP’s S1 estimates this market to be about $9.6B (online poker when it was illegal to operate in the U.S. was already a $2B market) so this number is not crazy. Other sources have numbers ranging from $6B to $20B. We will value each scenario:

 

     

CZR Branded Sites

 

888/Partner Sites

     

Bear

Base

Bull

 

Bear

Base

Bull

Total Addressable Market

6,000

9,600

20,000

 

6,000

9,600

20,000

Market Share

 

20.0%

15.0%

10.0%

 

10.0%

7.5%

5.0%

Potential Revenues

 

1,200

1,440

2,000

 

600

720

1,000

  EBITDA Margin

 

15.0%

15.0%

15.0%

 

25.0%

25.0%

25.0%

EBITDA

   

180

216

300

 

150

180

250

Multiple (using midpt of comps)

13.0x

13.0x

13.0x

 

13.0x

13.0x

13.0x

  TEV/Equity Value

 

2,340

2,808

3,900

 

1,950

2,340

3,250

Ownership

   

75.0%

75.0%

75.0%

 

36.8%

36.8%

36.8%

  Total Potential value to CGP

1,755

2,106

2,925

 

717

860

1,194

                   

Total Combined

 

2,472

2,966

4,119

       
                   

CAC Share (43%)

 

1,063

1,275

1,771

       

Per Share of CAC

 

$8.5

$10.2

$14.1

       

PV (50% Discount at least)

$4.24

$4.58

$4.94

       
                   

CZR Share (57%)

 

1,409

1,691

2,348

       

Per Share of CZR

 

$11.2

$13.5

$18.7

       

PV (50% Discount at least)

$5.62

$6.07

$6.55

       

 

So when we add this together, I believe that CAC will be worth between $23-$28 without any future growth projects. On a PV basis, CAC is worth between $15.4-$16.1. Lets just call it $15.5, i.e. When a CZR shareholder purchases the right to buy 1 share of CAC (ticker CGP), he will pay $9.43 for something that is worth $15.50. I believe this will be a very popular no-brainer trade. Moreover, CZR has a potential project in Boston and the recently announced potential projects in Japan, that will eventually end up in CGP as well. CGP is after all Caesar Growth Partners, it will be the growth vehicle for the combined entities. It is very well capitalized and has a great management team, setting it up for a lot of success.

 

When CGP trades at $15.5 (potentially is worth $28 ex Boston & Japan), CZR’s stake (57%) is going to be worth $20.5/share. Recall that we have already determined that PropCo & HoldCo are worth $12/share. This makes CZR worth $32.5/share currently. However, since we stand to make almost $5.5/share on CGP (which I think a lot of people would want to get long), I expect that CZR shares will trade through intrinsic value and reflect the potential in CGP and should trade at $32.5+$5.5 = $38, about 45% upside in the near future.

 

However, this is really the gift that keeps on giving, I do believe that there is equity value at OpCo post a friendly debt restructuring given that the 2nd liens should be happy to convert once the stripping of the parent guarantees leave them out in the cold. Plus, we have Boston and Japan and the potential allocation of current growth projects underway at CZR (LINQ and Gansevoort, which should be very attractive).

 

There is one other interesting wrinkle to be aware of. CZR is a heavily, heavily shorted stock. There is a very low float. If you are short CZR, a few really bad things can happen to you. First, you have to be a registered holder of CZR to exercise your right (per the S1). The rights are non-transferrable and non-tradable!

 

I believe that owners of CZR who want to exercise their rights (like any rights offering, if you don’t exercise, you get diluted) will recall their shares in CZR compelling shorts to cover. This may not occur since banks can synthetically create rights to force shorts to provide you fair value of the right. However, you don’t benefit from the over-subscription feature if this is the case so you will recall anyway in order to potentially get more than 1 share of CGP for every share of CZR. It is a very scary dynamic.

 

Not only are the shorts going to be potentially recalled, they are also short CGP as they can’t cover the right in the market. I understand if you want to be short CZR but it makes no sense to be short CGP. CGP will have similar technical dynamics on its first trading day. Lots of short interest, low float, lots of real new buyers who want exposure to this growth story at a very attractive price.

 

If I am correct in valuing CZR at $32.5, then CZR shorts stand to lose $12/share on CZR and CGP combined from the current price. This is why I believe the stock will trade at $38 pre the rights offering (which should happen in the next 4 weeks).

 

However, that is just current intrinsic value. Las Vegas trends are improving dramatically as evidenced by MGM stock. 2014 and 2015 are setting up to be very good convention years (40% of CZR is Vegas). PropCo CMBS debt is currently in negotiation to be refinanced and should take the near-term 2015 maturity out of the equation. This gives CZR 3 years of run-way before they have a liquidity problem. In the meantime, they burn $500M/year. However, I believe that very soon, they will negotiate with the 2nd lien holders by removing the Parent guarantee (requires refinancing or paying off of Senior Unsecured Notes). The interest expense on the 2nd liens incidentally is $550M. Once you cross that hurdle, this becomes a levered structure that can actually de-lever where this is massive amounts of value in the component parts. This is one of Apollo’s biggest deals. I don’t believe they will allow this company to go bankrupt so easily and I believe that the equity market has been very wrong in realizing how fixable this situation is and how dangerous the technical dynamics of the short thesis are, especially as CZR owners begin to recall their shares for the rights offering.

 

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

Catalyst

PropCo refinancing (imminent)
CGP Rights offering (imminent)
 
    sort by   Expand   New

    Description

    I am recommending a long position in CZR with a price target of $38 in the next 1-2 months. I believe CZR is severely misunderstood and very poorly analyzed, so much so that the recent move in the stock has simply confounded people. Not only is the recent move justified, in my opinion, there is more to go. Here is why I believe the stock will trade to $38 in the short term:

     

    CZR is a very out of consensus idea. It is heavily shorted (almost unborrowable at this point), every analyst that covers it either has a hold or a sell rating and the shorts are constantly in the press, pitching it as a bankruptcy candidate. Not only do I think CZR is not going bankrupt, I believe there is significant upside in the stock.

     

    The reasons to dislike CZR are obvious. It is levered over 12x EBITDA, they burn almost $500M in cash/year and they have a 2015 $4.5B maturity that the shorts believe they can’t get past. It is easy to believe that there is no equity value under all this debt so CZR is not only technically bankrupt, it will run out of cash in 3 years. None of that will matter, according to the shorts because CZR won’t be able to refinance its $4.4B PropCo CMBS maturity for 2/15, which will push the company into bankruptcy even earlier.

     

    I believe this thought process to be very wrong. One cannot look at CZR as one levered company. It has many component parts that are in fact bankruptcy-remote to each other. There is a HoldCo, a PropCo, an OpCo and now a SpinCo. CZR is spinning off (through a rights offering) many interesting and attractive properties into CAC (Caesars Acquisition Co). This company will trade under the ticker “CGP”. It will be very under-levered, generate a lot of cash, and will be CZR’s growth vehicle. It will be a very attractive stock to own and at the rights offering price of $9.43/share, I believe very cheap.

     

    The entire PropCo structure has traded up significantly in the last few weeks as Debtwire is reporting that CZR is in the market to refinance this entity. I believe this process will soon be finished and take near-term bankruptcy risk off the table. The next time the company will have potential issues is going to be 2017 (3 years away). But I believe even that is fixable.

     

    PropCo currently has $4.4B of debt and will do about $515M of EBITDA in 2014. I believe that this debt burden will be reduced to $4B through negotiation and improving the collateral pool at PropCo (I would explain further but then it would become a very long pitch. Once you start to work on this, it is easy to see how this is possible). The refinanced structure will have many component pieces probably, including a PIK note (possibly) so that while PropCo credit doesn’t trap real liquidity in the structure, it accretes value while CZR doesn’t de-lever. I believe the blended rate on this structure will be about 7% and PropCo is worth about $8.5/share.

     

    PropCo

     

    EBITDA

    515

    Interest

    (280)

    CapEx

    (85)

      Free Cash Flow

    150

    Multiple

    7.0x

    Equity Value

    1,050

    Equity Value/share

    $8.4

     

    Further there is cash and some receivables at HoldCo worth about $3.75/share. Together PropCo & HoldCo are worth about $12/share.

     

    This brings us to OpCo, the ugly stepchild. OpCo is levered 13x EBITDA and arguably drains equity value from the rest of the entities. I believe this is incorrect. There is a set of parent guarantees at OpCo that link it to the rest of the entities. However, these guarantees can be removed, making OpCo its own animal. OpCo could be worth zero but I don’t believe it has negative value to CZR.

     

    The Parent guarantee reads:

     

    In addition, the Parent Guarantee is automatically released upon the election of the Issuer and notice to the Trustee if the guarantee by Caesars Entertainment of the Credit Agreement, the Existing Notes or any other Indebtedness which resulted in the obligation to guarantee the Notes has been released or discharged.

    Definitions:

    “Existing Notes” means the Issuer’s 5.375% Senior Notes due 2013, 5.625% Senior Notes due 2015, 6.500% Senior Notes due 2016, 5.75% Senior Notes due 2017, 10.75% Senior Notes due 2016 and 10.75%/11.50% Senior Toggle Notes due 2018.

    “Credit Agreement” means (i) the credit agreement, dated as of January 28, 2008, entered into in connection with the consummation of the Acquisition, among the Issuer, the pledgors named therein, the financial institutions named therein, and Bank of America, N.A., as Administrative Agent and Collateral Agent, as amended, restated, supplemented, waived, replaced (whether or not upon termination, and whether with the original lenders or otherwise), restructured, repaid, refunded, refinanced or otherwise modified from time to time, including any agreement or indenture extending the maturity thereof, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement or agreements or indenture or indentures or any successor or replacement agreement or agreements or indenture or indentures or increasing the amount loaned or issued thereunder or altering the maturity thereof and (ii) whether or not the credit agreement referred to in clause (i) remains outstanding, if designated by the Issuer to be included in the definition of “Credit Agreement,” one or more (A) debt facilities or commercial paper facilities, providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose entities formed to borrow from lenders against such receivables) or letters of credit, (B) debt securities, indentures or other forms of debt financing (including convertible or exchangeable debt instruments or bank guarantees or bankers’ acceptances), or (C) instruments or agreements evidencing any other Indebtedness, in each case, with the same or different borrowers or issuers and, in each case, as amended, supplemented, modified, extended, restructured, renewed, refinanced, restated, replaced or refunded in whole or in part from time to time.

     

    I believe the easiest way for CZR to remove the parent guarantees is to pay down or refinance the “Existing Notes” or Senior Unsecured Notes. These are $2.1B worth of paper trading at 70 cents. CZR already owns $1.1B of this paper and is contributing it to CAC so they only need to get rid of another $1B worth. With $1.8B of cash, $1B of potential new debt capacity, $800M of cash coming in from the Macau land sale and the CGP rights offering, CZR has plenty of liquidity to remove the guarantee from OpCo. (While I believe the guarantee language is clear, it is a good idea to get legal advice on it when you begin doing serious work)

     

    This completely makes OpCo bankruptcy-remote to the rest of the structure, allowing us to value the other businesses separately. However, even though OpCo can’t mess things up, there are plenty of interesting assets at OpCo. I believe after removing the guarantee CZR will go to the 2nd liens, who will sit under 7x of debt ($5.5B of paper at 10%, trading at 60 cents) and negotiate with them to equitize their stake. Since there is a high likelihood that the 2nd liens wont be the fulcrum security in bankruptcy, it is in their interest to negotiate with CZR to get a piece of the now, very interesting equity. Not only will this move de-lever OpCo significantly, it will allow OpCo to generate cash and de-lever naturally, making the equity position very attractive. I believe the market is totally missing CZR’s ability to restructure their debt in this manner. (I am happy to lay out what I think this deal will look like and why the 2nd liens would do it but again, it would make for a really long writeup right now)

     

    There is potentially lots of value at OpCo but for now, let’s just assume that it’s worth zero and move on to CAC. CZR (sometime in the next 4 weeks probably) will do a rights offering to give its shareholder the rights to purchase 1 share of CAC for every share of CZR they hold.

     

    The Sponsors (who own 70% of the equity) have committed to excersising $500M worth of rights. There will be a pro-rata over-subscription for un-exercised rights. For our purposes, we will assume that all the rights will be exercised by someone. Post the offering, CZR will own 57% of CGP and CAC (publically owned piece) will own 43%.

     

    Here are the assets that will sit in CGP:

     

    Planet Hollywood Casino & 50% of the management fee of PH

    Horseshoe Baltimore Development & 50% of the management fee of HB

    $1.1B of CEOC (OpCo notes, yielding over 9% at contributed value)

    Over $900M of cash

    Caesars Interactive Entertainment (CIE)

     

    CAC will have 125.4M shares outstanding (recall that this will be 43% of the ownership of CGP)

     

    Here’s what I think these assets are worth:

     

       

    Metric

    Amount

    Multiple

    Debt

    Owned

    Equity

    Discount

    PV/ Fair Value

    Planet Hollywood

    2014 EBITDA

    90

    10.0x

    515

    100%

    385

     

    385

    PH Management Fee

    2014

    18

    15.0x

    0

    50%

    135

     

    135

    Horseshoe Baltimore

    2016 EBITDA

    100

    8.0x

    365

    52%

    226

    80%

    181

    HB Management Fee

    2016

    15

    15.0x

    0

    50%

    113

    80%

    90

    CEOC Notes

       

    1,100

       

    100%

    1,100

    68%

    748

    Cash (will be deployed accretively)

     

    950

    1.5x

     

    100%

    1,425

    70%

    998

    CIE (ex real-money online gambling)

    2014 EBITDA

    85

    12.0x

    50

    75%

    728

     

    728

    real-money online gambling (to be discussed later)

           

     

     

     

      Total

               

    4,111

     

    3,264

    CAC Share (43%)

             

    1,768

     

    1,404

    Per Share of CAC

             

    $14.1

     

    $11.2

                       

    CZR Share (57%)

             

    2,343

     

    1,860

    Per Share of CZR

             

    $18.7

     

    $14.8

     

    Real-money online gambling is a key part of the thesis here and there are varying views on how big this market will be. One thing to remember here is the CZR has about 30% share of the total gaming market in the U.S. and with their partner 888, they will be a formidable force in this market and are set up to be the market leader. I would recommend reading some of the Morgan Stanley pieces on market sizing.

     

    CGP’s S1 estimates this market to be about $9.6B (online poker when it was illegal to operate in the U.S. was already a $2B market) so this number is not crazy. Other sources have numbers ranging from $6B to $20B. We will value each scenario:

     

         

    CZR Branded Sites

     

    888/Partner Sites

         

    Bear

    Base

    Bull

     

    Bear

    Base

    Bull

    Total Addressable Market

    6,000

    9,600

    20,000

     

    6,000

    9,600

    20,000

    Market Share

     

    20.0%

    15.0%

    10.0%

     

    10.0%

    7.5%

    5.0%

    Potential Revenues

     

    1,200

    1,440

    2,000

     

    600

    720

    1,000

      EBITDA Margin

     

    15.0%

    15.0%

    15.0%

     

    25.0%

    25.0%

    25.0%

    EBITDA

       

    180

    216

    300

     

    150

    180

    250

    Multiple (using midpt of comps)

    13.0x

    13.0x

    13.0x

     

    13.0x

    13.0x

    13.0x

      TEV/Equity Value

     

    2,340

    2,808

    3,900

     

    1,950

    2,340

    3,250

    Ownership

       

    75.0%

    75.0%

    75.0%

     

    36.8%

    36.8%

    36.8%

      Total Potential value to CGP

    1,755

    2,106

    2,925

     

    717

    860

    1,194

                       

    Total Combined

     

    2,472

    2,966

    4,119

           
                       

    CAC Share (43%)

     

    1,063

    1,275

    1,771

           

    Per Share of CAC

     

    $8.5

    $10.2

    $14.1

           

    PV (50% Discount at least)

    $4.24

    $4.58

    $4.94

           
                       

    CZR Share (57%)

     

    1,409

    1,691

    2,348

           

    Per Share of CZR

     

    $11.2

    $13.5

    $18.7

           

    PV (50% Discount at least)

    $5.62

    $6.07

    $6.55

           

     

    So when we add this together, I believe that CAC will be worth between $23-$28 without any future growth projects. On a PV basis, CAC is worth between $15.4-$16.1. Lets just call it $15.5, i.e. When a CZR shareholder purchases the right to buy 1 share of CAC (ticker CGP), he will pay $9.43 for something that is worth $15.50. I believe this will be a very popular no-brainer trade. Moreover, CZR has a potential project in Boston and the recently announced potential projects in Japan, that will eventually end up in CGP as well. CGP is after all Caesar Growth Partners, it will be the growth vehicle for the combined entities. It is very well capitalized and has a great management team, setting it up for a lot of success.

     

    When CGP trades at $15.5 (potentially is worth $28 ex Boston & Japan), CZR’s stake (57%) is going to be worth $20.5/share. Recall that we have already determined that PropCo & HoldCo are worth $12/share. This makes CZR worth $32.5/share currently. However, since we stand to make almost $5.5/share on CGP (which I think a lot of people would want to get long), I expect that CZR shares will trade through intrinsic value and reflect the potential in CGP and should trade at $32.5+$5.5 = $38, about 45% upside in the near future.

     

    However, this is really the gift that keeps on giving, I do believe that there is equity value at OpCo post a friendly debt restructuring given that the 2nd liens should be happy to convert once the stripping of the parent guarantees leave them out in the cold. Plus, we have Boston and Japan and the potential allocation of current growth projects underway at CZR (LINQ and Gansevoort, which should be very attractive).

     

    There is one other interesting wrinkle to be aware of. CZR is a heavily, heavily shorted stock. There is a very low float. If you are short CZR, a few really bad things can happen to you. First, you have to be a registered holder of CZR to exercise your right (per the S1). The rights are non-transferrable and non-tradable!

     

    I believe that owners of CZR who want to exercise their rights (like any rights offering, if you don’t exercise, you get diluted) will recall their shares in CZR compelling shorts to cover. This may not occur since banks can synthetically create rights to force shorts to provide you fair value of the right. However, you don’t benefit from the over-subscription feature if this is the case so you will recall anyway in order to potentially get more than 1 share of CGP for every share of CZR. It is a very scary dynamic.

     

    Not only are the shorts going to be potentially recalled, they are also short CGP as they can’t cover the right in the market. I understand if you want to be short CZR but it makes no sense to be short CGP. CGP will have similar technical dynamics on its first trading day. Lots of short interest, low float, lots of real new buyers who want exposure to this growth story at a very attractive price.

     

    If I am correct in valuing CZR at $32.5, then CZR shorts stand to lose $12/share on CZR and CGP combined from the current price. This is why I believe the stock will trade at $38 pre the rights offering (which should happen in the next 4 weeks).

     

    However, that is just current intrinsic value. Las Vegas trends are improving dramatically as evidenced by MGM stock. 2014 and 2015 are setting up to be very good convention years (40% of CZR is Vegas). PropCo CMBS debt is currently in negotiation to be refinanced and should take the near-term 2015 maturity out of the equation. This gives CZR 3 years of run-way before they have a liquidity problem. In the meantime, they burn $500M/year. However, I believe that very soon, they will negotiate with the 2nd lien holders by removing the Parent guarantee (requires refinancing or paying off of Senior Unsecured Notes). The interest expense on the 2nd liens incidentally is $550M. Once you cross that hurdle, this becomes a levered structure that can actually de-lever where this is massive amounts of value in the component parts. This is one of Apollo’s biggest deals. I don’t believe they will allow this company to go bankrupt so easily and I believe that the equity market has been very wrong in realizing how fixable this situation is and how dangerous the technical dynamics of the short thesis are, especially as CZR owners begin to recall their shares for the rights offering.

     

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

    Catalyst

    PropCo refinancing (imminent)
    CGP Rights offering (imminent)
     

    Messages


    Subjectnear term risk?
    Entry09/11/2013 09:27 PM
    Membermm202
    Is there any realistic risk of the company filing for BK in the short term if the spin-off somehow doesn't go through? I wouldn't think so based on their debt maturities, but the high put premiums on the October 17.5 and 20 puts make me wonder if I'm missing some "gotcha" risk here. TIA

    Subjectmuch more conservative way to play this
    Entry09/12/2013 11:47 AM
    Membertyler939
    I just started looking at this idea, so I express no opinion as to the merits at this time, but a much more conservative way to play this is to sell the october 35 and 30 put options.  With stock around 25.20 as I type, if you are right you will make about 12 dollars selling the 35 options and around 7.9 selling the 30s.  If you are wrong, you will be buying CZR at around 23 vs the current 25.2.  This seems like a better risk reward.

    SubjectRE: near term risk?
    Entry09/12/2013 02:10 PM
    MemberAstor
    I don't think so. Obviously if there is a market-wide credit event or big natural disaster in Vegas, we have a problem but PropCo is the first big maturity in Feb 2015. They have $1.8B in cash to ride out minor problems and some more cash coming in from the Macau land sale, even if the rights offering doesn't happen (which I think is unlikely). The vol on the stock is high. I don't think the vol on the puts is any higher than on the calls so the skew isn't telling us much other than it's getting really hard to borrow.

    SubjectRE: much more conservative way to play this
    Entry09/12/2013 02:12 PM
    MemberAstor
    The one big issue with that trade (and I don't dislike it) is that you don't get the CGP rights so you are giving away upside over there.

    SubjectRE: RE: much more conservative way to play this
    Entry09/12/2013 02:26 PM
    Membertyler939
    First of all, the implied vol of the puts is much higher than the implied vol of the calls.  Put buyers are paying you about $2.5 extra in October, on top of the premium for the calls.  That said, I have some other issues with the write up.  First, you assume that CZR gets full credit for the shares of CAQ it owns.  Generally in stub trade situations, the parent never gets full credit.  

    Second, the removal of the parent guarantee in the OpCo debt discussion appears critical to your thesis and your 1-2 month price target of $38 suggests this can be done quickly.  

    Can you elaborate on this? Do we have any indication this in the works? And if so, why do you think this hasn’t been communicated to the market (unlike the PropCo progress that the market seems to have a sense of).  Your valuation seems to assume a sea change in consensus expectation from fear of bankruptcy to not just all is well, but all is perfect.  I find it hard to believe that the market is going to turn on a dime like this.  As for short covering, someone short will have to cover CAQ, but they will receive the proceeds from the subscription price, so there is an offset, and I doubt if there is much in the way of the over subscription privilege coming into play given the dynamics here.
     
    Ultimately, this may work out very well, but I think your short term price target is way too high.

    SubjectWhat are the seeking alpha pieces missing?
    Entry09/13/2013 11:34 AM
    Membertyler939
    It is a pretty complicated story.  Perhaps it would be easier to explain why the bearish articles on seeking alpha - there isn't much street research - (and the hedge funds that have bet accordingly) have it wrong.  I have linked to one below (I already made my comments in a previous post as to why I think your price target is overly optimistic to say the least, but I think those are obvious).
     

    SubjectParent Guarantee
    Entry09/16/2013 12:56 PM
    MemberSiren81

    If you look at Note 8 in the last Q it seems like substantially all the debt has a parent guarantee (not just the $2.1B you mention). Is this not correct? It would seem uncommon for secured notes not to have such a guarantee…


    SubjectRE: RE: much more conservative way to play this
    Entry09/16/2013 10:28 PM
    MemberAstor
    You are right on the puts. Apologies, I was getting confused between posts.
     
    I also agree that generally the parent doesnt get full credit in stub situations but in this case CZR has an explicit call option on CAC so they should get full economic benefit since they can call the structure back at fair market value.
     
    I don't think the company needs to fix the OpCo situation for the stock to work. So far, consensus opinion has been that there is no value here whatsoever. Once PropCo gets refi'd and near-term bankruptcy risk is removed, the company will begin work on OpCo. You have to price the tails. Removing a tail creates plenty of equity value. I'm suggesting a fairly contrarian view point that I don't think is discounted in the stock at all. Once CZR is able to restructure OpCo, I would have a significantly higher price target. I am happy to go into more detail if you like but I suspect that OpCo will get restructured before the end of the year.
     
    I understand that you would get the proceeds of the rights offering if you were short. However, at my price target for CAC, you still lose money and I have factored in the proceeds you receive into the analysis.

    SubjectRE: Parent Guarantee
    Entry09/16/2013 10:32 PM
    MemberAstor
    Some of the guarantees are contingent guarantees. The disclosure is fairly clear that if the company's obligation to certain pieces of the structure (Credit Agreement and Existing Notes) is fulfilled, the guarantees can be removed.

    SubjectRE: Parent Guarantee
    Entry09/17/2013 02:35 PM
    MemberSiren81

    You seem to be familiar with the documents so I’ll take your word, but it would strike me as very odd if if CZR could just file the opco without their being a claim to the parent from other classes of creditors… esp since some of this paper was issued fairly recently when the OpCo distress was already clear.


    SubjectRE: RE: Parent Guarantee
    Entry09/17/2013 03:09 PM
    Membertyler939
    Would you mind citing the specific language to support your thesis? 

    Subject2 million share block is trading at $25.25
    Entry09/17/2013 04:36 PM
    Membertyler939
    Morgan Stanley per Street Account.

    SubjectRe: Parent Guarantee
    Entry09/17/2013 05:52 PM
    Membertyler939

    To elaborate on my question and previous post regarding language, all of the street research I have read on CZR is bearish, and the primary reason is OpCo’s ability to drag the company down. You suggest that tail scenarios “have to be priced in”, yet potential bankruptcy due to OpCo, the main concern on the street, somehow disappears once Propco gets taken care of. From reading your pitch, fixing OpCo may not indeed be essential for the stock to stay alive in the immediate future, but it does seem integral to getting to your price target, which is why it would be very helpful to see more on that in terms of specific disclosure language and breakdown of contingent vs non-contingent guarantees. And again, if you can, please expand on the “before the end of the year” expectation for the OpCo restructuring.  If OpCo is not going to happen in the near term, why will fixing Propco cause a sea change in sentiment, since it is already known by the market that this is in the works?  Once again, I have linked to a seeking alpha article, which I think lays out the concensus view.  You will note that it assumes PropCo will be resolved (ie. the bear case is not based on Propco debt).

     
     

    SubjectRE: CAC questions
    Entry09/17/2013 11:53 PM
    MemberAstor
    just wanted to make sure that you received my response. My browser crashed as I sent it. If not, please let me know and I will write it out again.

    SubjectRE: RE: RE: Parent Guarantee
    Entry09/17/2013 11:55 PM
    MemberAstor
    It's in the writeup actually but here is the entire language from the 10% 2018 2nd Lien Notes:
     

    Parent Guarantee

    The Parent Guarantor irrevocably and unconditionally guarantees on a senior basis the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Issuer under the Indenture and the Notes, whether for payment of principal of, premium, if any, or interest or additional interest on the Notes, expenses, indemnification or otherwise (all such obligations guaranteed by the Parent Guarantor being herein called the “Parent Guaranteed Obligations”). The Parent Guarantor agrees to pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the Trustee or the holders in enforcing any rights under the Parent Guarantee.

    The Parent Guarantee is subject to important limitations. The Parent Guarantor and each of its Subsidiaries (including the Real Estate Subsidiaries, but other than the Issuer and the Restricted Subsidiaries) are not subject to any of the covenants set forth below other than those described under “—Merger, Amalgamation, Consolidation or Sale of All or Substantially All Assets,” and each of the Subsidiaries of the Parent Guarantor (including the Real Estate Subsidiaries, but other than the Issuer and the Restricted Subsidiaries) do not guarantee or otherwise are required to provide credit support for the Notes. As a result, the Parent Guarantee is effectively subordinated to the present and future liabilities of the Parent Guarantor’s Subsidiaries (other than the Issuer and the Restricted Subsidiaries). As of September 30, 2009, these liabilities were approximately $11,100 million.

    The Parent Guarantee is a continuing guarantee and shall:

     

      (1)   remain in full force and effect until payment in full of all the Parent Guaranteed Obligations;

     

      (2)   subject to the next succeeding paragraph, be binding upon the Parent Guarantor and its successors; and

     

      (3)   inure to the benefit of and be enforceable by the Trustee, the holders and their successors, transferees and assigns.

    The Parent Guarantee will be automatically released upon:

     

      (1)   the Issuer ceasing to be a Wholly Owned Subsidiary of Harrah’s Entertainment;

     

      (2)   the Issuer’s transfer of all or substantially all of its assets to, or merger with, an entity that is not a Wholly Owned Subsidiary of Harrah’s Entertainment in accordance with the covenant described under “—Merger, Amalgamation, Consolidation or Sale of All or Substantially All Assets,” and such transferee entity assumes the Issuer’s obligations under the Indenture; and

     

      (3)   the Issuer’s exercise of its legal defeasance option or covenant defeasance option as described under “—Defeasance” or if the Issuer’s obligations under the Indenture are discharged in accordance with the terms of the Indenture.

    In addition, the Parent Guarantee is automatically released upon the election of the Issuer and notice to the Trustee if the guarantee by Harrah’s Entertainment of the Credit Agreement, the Senior Interim Loan Facility, the Existing Notes or any other Indebtedness which resulted in the obligation to guarantee the Notes has been released or discharged.

     


    SubjectQuestion on timing
    Entry09/18/2013 06:35 PM
    Membertyler939
    Bss, does the timing of the refinancing tell you anything about the timing of the rights offering (for example, does the fact that they have formally launched mean that they have gotten the final sign off from the SEC and are just awaiting all the regulatory approvals, or that they have to finish the refinancing before launching the rights offering (maybe because they have to update the prospectus or for some other reason), or anything along those lines?  Thanks.

    SubjectAs long as I'm asking...
    Entry09/18/2013 06:51 PM
    Membertyler939
    What are your feelings about the terms of the refinancing?  Were they incrementally better or worse than you were expecting?  I know this is not a big part of the thesis, and I attribute today's drop to the 2 million share block, but were there any surprises re the terms?

    SubjectRE: RE: RE: CAC questions
    Entry09/23/2013 05:14 PM
    Membertyler939
    rskfrarb, the call language is very vague (I assume, but it is not clear, that if CAQ is trading, they will use market price as opposed to appraised value, and there are no timing periods for calculating either the value of the CAC stock or the CZR stock used as payment, unlike the typical merger agreement).  Have you seen many call provisions that are this vague in public deals?

    SubjectRE: RE: RE: RE: RE: CAC questions
    Entry09/23/2013 09:23 PM
    Membertyler939
    Risk, I have two questions:  1). I assumed fair value meant market price with regard to clause 1.  I assumed the appraisal was in the case there was no listing.  Is it your opinion that if CAQ is trading at 80, hypothetically, czr can come in with an appraiser and take it at $50, for example?  2). Any guess as to how long this is going to take?  They have gotten all the regulatory approvals they need.  They are just waiting on the SEC.  I figured any agreements they have left are being reviewed now.  Do you see anything big that is missing, or anything that looks like it will take a while to sort out (Or any reason the current refi will delay commencement of the rights offering)?  The last version of the S-1 was over a month ago.

    SubjectRE: RE: RE: RE: RE: CAC questions
    Entry09/23/2013 09:31 PM
    Membertyler939
    Risk, I have two questions:  1). I assumed fair value meant market price with regard to clause 1.  I assumed the appraisal was in the case there was no listing.  Is it your opinion that if CAQ is trading at 80, hypothetically, czr can come in with an appraiser and take it at $50, for example?  As for the 25% cap, i thought it only modified the second clause (you get the appraisal price if its greater than the 25%)   2). Any guess as to how long this is going to take?  They have gotten all the regulatory approvals they need.  They are just waiting on the SEC.  I figured any agreements they have left are being reviewed now.  Do you see anything big that is missing, or anything that looks like it will take a while to sort out (Or any reason the current refi will delay commencement of the rights offering)?  The last version of the S-1 was over a month ago.

    SubjectRE: RE: RE: RE: RE: RE: CAC questions
    Entry09/23/2013 09:33 PM
    Membertyler939
    Sorry for the dupe post.  The second one addresses the 25% cap which I think only applies to the second clause.

    SubjectRE: CAC
    Entry09/25/2013 02:50 PM
    Membertyler939
    From further conversations, although it is not written this way, I believe the call is the greater of 10.5 % IIR annualized and an appraisal capped at 25% irr annualized.  Don't shoot me if I am wrong.

    SubjectRskf, anyone else want to opine on bankruptcy
    Entry09/25/2013 03:51 PM
    Membertyler939
    I know this is getting away from the original writeup, but since the author has gone radio silent anyway, I was wondering if anyone else had a strong opinion as to the chances CZR won't be able to meet the conditions to exercise the call provision in 3 years (and perhaps more importantly, will Apollo/ TPG find a way to take it regardless)?

    SubjectRE: Call/Liquidation Right
    Entry10/16/2013 01:47 AM
    Membertyler939
    AAOI - If you are just looking a this now, be warned, it is too late to buy CZR and get the rights.  It went ex rights today.
     
    As to your question, you understand the situation correctly, although since CZR owns a chunk of CAQ, I think they will be incentivized to see it perform well.
     
    Exhibit 10.1 to latest S-1, section 7.5 spells it out best:  After 3 years, they have a call right at appraised value, with a floor of return of capital +10.5% annualized rate of return and a cap of return of capital + 25% annualized rate of return.  The interesting aspect, at least for me, is that CZR has certain liquidity/solvency requirements to exercise the call right.  I believe Apollo is worried CZR may go bankrupt and is trying to wall off some assets, or at least give itself some flexibility, so I would not be surprised if CAQ trades outside of the call range.  FWIW, I think it would be a big mistake to short CAQ on the theory that the call right will act as a cap on the price.

    SubjectFitch article
    Entry11/07/2013 05:31 PM
    Memberelehunter
     
    And here comes the removal of that parent guarantee (which was not worth much apparently!).  As the author of the short recommendation right before the stock took off, I humbly take my hat off to bss1276 for finding the secret to Apollo's financial engineering success.  The correct short was not the common equity (although now that the ex date has passed for the spin, shorting CZR may have some merit because CGP is the only solvent entity) but shorting the 10% 2nd lien notes which have now gone from 70 in January 2013 to 45 currently.  This somewhat reminds me of when Sam Zell financed an LBO of Tribune by borrowing against the employees pension plan and using that money to buy them stock - the employees were wiped out yet Zell's $315M investment was in debt that was only partially impaired.  This may not be a traditional bankruptcy, but it sure looks like a distressed debt exchange is in the works. 

    SubjectRE: RE: RE: CACQ
    Entry11/27/2013 08:55 PM
    Membertyler939
    I agree with Fletch.  This structure was created to remove the internet and some other assets out of the bankruptcy process.  I would also point out that the sponsors and Paulson own around 75% of the outstanding stock and I doubt they are sellers as at the very least it is a hedge against their CZR positions.

    SubjectRE: RE: RE: RE: CACQ
    Entry11/28/2013 07:18 PM
    Membertyler939
    Two other data points to consider re CACQ valuation: immediately prior to the rights distribution, conversions on czr stock were trading at $2.50 over intrinsic value ( buying czr stock which gave you the right to subscribe for cacq and selling czr stock synthetically by buying a put and selling a call - a way of buying the non transferable right, was trading for $2.50), essentially valuing cacq at $11.14 ($8.64 +$2.5).  Also later in the grey market prior to cacq opening for trading, I was quoted $12 3/8 at $12 5/8.

    Subjecttime to revisit?
    Entry05/29/2014 05:50 PM
    Membermrsox977
    Can somebody explain how the equity has any value?
    http://online.wsj.com/articles/apollo-uses-wedge-maneuver-to-save-caesars-1401311292?ru=yahoo?mod=yahoo_itp

    SubjectRE: time to revisit?
    Entry05/30/2014 06:40 AM
    Memberbedrock346
    Article reads like apollo is using shld moves to transfer assets and value to equity but hard to be sure.

    SubjectRE: time to revisit?
    Entry05/30/2014 05:56 PM
    MemberCries

    Option value.  At its face, its worth nothing.  But they claim they have stripped the guarantee (not sure this would hold up if they filed) to give themselves leverage in negotiating against creditors – and it looks like its working. 

    If you think they get a coercive exchange done, then the CZR entity will keep its equity undiluted, and they will give the creditors a pile of shit (AKA, OpCo equity). 

    The CZR equity will retain ownership and CGP and CERP free & clear.  The only way I see this not working out is if the credit markets shut down and they cant get a decent exchange done. 

     

    Ive been following this for a bit over a year now, and I am very impressed with how Apollo played their cards.  Looking back, every bank amendment and new issuance that took place in the CZR complex over the last year was very well crafted.  Beyond the equity, I loved how they preserved the value of the pre-LBO notes throughout this process, and even ended up rolling their stake into the new first-out TL. 

    Needless to say, if anyone from Apollo is reading this and is looking to hire an analyst – I’d probably do it for free, lol.  Those guys are evil geniuses.


    SubjectBonds holders file default notice
    Entry06/06/2014 03:35 PM
    Membermitc567
    Hi,
     
    It looks like this will be fought in court.  Always hard to handicap these cases, but I personally feel the bondholders have a case and that CZR will have to negotiate a dilutive equity swap with them.  IMHO
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