CAESARS ENTERTAINMENT CORP CZR S
November 05, 2012 - 1:37pm EST by
elehunter
2012 2013
Price: 5.79 EPS $0.00 $0.00
Shares Out. (in M): 126 P/E 0.0x 0.0x
Market Cap (in $M): 730 P/FCF 0.0x 0.0x
Net Debt (in $M): 18,800 EBIT 0 0
TEV ($): 19,500 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Gaming
  • Casino
  • Highly Leveraged
 

Description

** Please note ** The write-up was completed prior to Hurricane Sandy and does not factor potential shortfall to financial results from further weakness in the Atlantic City gaming market. Also, CZR announced earnings on October 31, which does not change the thesis of this idea.
 

RECOMMENDATION:

I am recommending a short position in the common stock of Caesars Entertainment Corp (ticker CZR).  I believe this is an unsustainable capital structure, and while the company has so far been successful in delaying its day of reckoning through creative exchange offers, debt for equity swaps, and an amend and extend transaction involving its credit facility, the market is slowly but surely realizing that there is simply no equity value in this company.  I think the company will be forced to materially dilute its stock in order to stave off a forced bankruptcy with its enormous 2015 maturity wall looming. 

Net debt, pro forma for the sale of Harrah’s St Louis casino ($610M in proceeds), stands at $18.8B, and the company has seen its EBITDA decline from a peak of $2.8B in 2007 (coincident with the ill-fated LBO) to a current run-rate of around $2.0B (9.4X leverage).  The Achilles heel of this story is a remnant of the original LBO: $4.8B of its debt sits in the CMBS subsidiary (“PropCo”).  This debt bears interest at 3.3% (L+300) which allows the entity to generate free cash flow estimated at about $250M annually at the current run-rate which can partially fund cash operating deficits at the “OpCo” subsidiary Caesars Operating Company (“CEOC”), in turn estimated at about $600M annually.  This CMBS debt currently trades at the high 70s for a yield to maturity in February 2015 of roughly 16%, partly due to the high leverage (net debt/EBITDA of nearly 10.5X at “OpCo”).  Free cash flow at PropCo would be wiped out at an interest rate of just 8%.  The CMBS loans have been syndicated and require unanimous consent to be refinanced and must be done as an entire package. 

Caesars’ sponsors Apollo and TPG have done a nice job kicking the can down the road, but I believe the buck stops in 2015, and Caesars’ common equity will be sacrificed or at a minimum heavily diluted in every imaginable scenario.  As for timing, I believe CEO Gary Loveman does not want to leave this to the 11th hour, so we could see another large debt for equity swap sometime in 2013. 

BUSINESS BACKGROUND:

Caesars Entertainment Corp, formerly Harrah’s Entertainment, is the country’s largest regional gaming operator with 53 casinos owned, operated or managed in 12 US states and 7 foreign countries.  In the US, the casinos mainly operate under the Caesars, Harrah’s and Horseshoe brands.  The company also owns and operates several thoroughbred racetracks, including Bluegrass Downs and Turfway Park in Kentucky, and Thistledown Racetrack in Ohio.  The company has a growing presence in the online gaming market through its Caesars Interactive Entertainment (CIE) subsidiary.  CIE offers real-money gaming in the UK, France and Italy, as well as social and mobile gaming through its Playtika brand which was acquired in December 2011.  CIE owns the World Series of Poker brand which offers real-money land-based tournaments, and will be used to promote its online platform upon legalization in the US. 

Caesars was taken private in January 2008 by a consortium led by TPG and Apollo for $31B ($6B of equity put in).  The recession took a toll on the company, and it was forced to enter a series of distressed debt for equity exchanges with holders of the LBO debt.  In February 2012 the company did an IPO at $9.00 per share, raising just $19M.  The company currently has 125M shares outstanding of which Apollo/TPG own 70%, and Paulson & Co own 10%.  All of Paulson’s shares (10%) plus another 9% were immediately tradeable after the IPO (and have not been sold down per public filings) and a final 9% piece became tradeable after a 180-day lockup expired on August 5, 2012.  On March 15, 2012, Caesars filed an S-3 enabling it to sell $500M in primary shares in a public offering.  As the current market cap is roughly $730M, this would be 68% dilutive. 

Las Vegas (40% of LTM EBITDA):  Caesars has the second largest footprint on the Las Vegas Strip behind MGM with over 23K hotel rooms (25% market share behind MGM’s 44%), 9,500 slots and 880 table games.  Overall Las Vegas gaming revenue peaked in 2007 at $6.8B and after troughing at $5.6B in 2009 is running at about $6.0B currently.  This segment includes Caesars Palace, Bally’s Las Vegas, Flamingo Las Vegas, and Planet Hollywood Resort & Casino, among others.  The company expanded Caesars Palace in early 2012 through the addition of Octavius Tower (incremental $40M in EBITDA expected vs $120M construction cost) and plans on opening a new outdoor retail, dining and entertainment corridor called Project Linq in mid 2013, adding up to $100M in incremental EBITDA by 2014 vs a project cost of $520M.  LTM EBITDA for this segment of about $810M is down 30% from peak levels in 2007.

Atlantic City (13% of LTM EBITDA):  Caesars has a 40% share of the Atlantic City market, which has declined from $5.2B in gaming revenue in 2006 to $3.2B at the current run-rate.  This segment includes Harrah’s AC, Showboat AC, Bally’s AC, Caesars AC and Harrah’s Philadelphia.  Rising competition from Pennsylvania, Delaware and New York, and the recent opening of the competing Revel casino have put tremendous pressure on this division of Caesars, and while the company has stemmed some of the bleeding through aggressive cost-cutting efforts, LTM EBITDA of $280M is down 55% from peak levels in 2007 and the outlook from here is pretty dim. 

Regional Markets (37% of LTM EBITDA):  Caesars divides its other gaming jurisdictions into 4 other regions: Louisiana/Mississippi (12%), Iowa/Missouri (10%), Illinois/Indiana (11%), and Other Nevada (4%).  Louisiana/Mississippi is facing increased competition from Oklahoma-based Native American casinos, as well as new entrants along the Gulf Coast.  Iowa/Missouri is losing a third of its EBITDA due to the sale of Harrah’s St Louis to Penn National Gaming.  Penn just opened Hollywood Casino in Kansas City, the first expansion in that market in several years – this could be a problem for Caesars.  Illinois/Indiana also faces increased competition particularly from the launch of a city-owned casino in Chicago.  In addition a new casino near O’Hare airport opened last year and has already begun to impact Caesars’ Horseshoe Hammond casino.  Finally, Other Nevada faces increased competition from Native American properties in California.  Offsetting these competitive pressures, Caesars does have a decent pipeline of development projects in Ohio and Baltimore.  LTM EBITDA from the whole group at about $750M is down 25% from peak levels in 2007. 

Managed, International, Other (10% of EBITDA): Caesars manages the operations of 3 Native American casinos in the US: Harrah’s Ak-Chin in Arizona, Harrah’s Cherokee in North Carolina and Harrah’s Rincon in California.  This segment also includes the company’s international assets.  Caesars owns and manages the Conrad Punta del Este in Uruguay, owns the Caesars Windsor in Canada, and owns, operates or manages 13 hotels and casinos across the UK, Egypt and South Africa, collectively known as London Clubs International.  Caesars Interactive Entertainment results are also reported in this segment.  This segment is the growth driver of the company.  With Horseshoe Cleveland and Horseshoe Cincinnati added to the mix in 2012 and 2013, respectively, and good growth in online and social gaming from the Playtika acquisition, EBITDA could grow from $140M in 2011 to over $300M in 2014.

MODEL, VALUATION:

Below I’ve laid out a simplified consolidated model of Caesars Entertainment Corp from the perspective of the parent company.  Note that Caesar’s principal operating subsidiary is CEOC, which operates all of the company’s properties except the CMBS properties in Nevada (Rio, Flamingo, Harrah’s Las Vegas, Paris, and Harrah’s Laughlin) and the company’s interactive division CIE.  Of the roughly $2.0B in EBITDA expected at the consolidated level in 2012, $450M will come from PropCo (the CMBS properties) with the remaining $1.5B from OpCo (CEOC) and CIE.  CEOC’s credit facility has a covenant requiring that Caesars maintain a 4.75X first lien net debt/LTM adjusted EBITDA ratio (currently we’re at about 4.3X – not a lot of breathing room).  In addition, funds raised from asset sales from within the restricted group of properties within CEOC must be reinvested within the restricted group within 15 months of the sale.  Harrah’s St Louis was part of this restricted group.  As this was sold at a EV/EBITDA of 7.8X, it was a leveraging transaction (EV/EBITDA for Caesars is 10.2X).  Most assets that the company might consider selling would result in leveraging events. 

What I’d like to stress is that even using fairly generous assumptions (I assume good growth in the Las Vegas segment and in the Managed, International, Online & Other segment) the company will be loss-making through 2014 (right up to the $8B Maturity Wall).  The one call option that could potentially give new life to Caesar’s equity is legalization of online gaming in the US.  However in response to a question on the last conference call, the CEO said “I’m not terribly optimistic.  I think it’s possible but I think there are some very pressing issues for the country’s finances that remain in front of the Congress in the lame duck session, and surely we all hope that they get attention.  It’s possible that the online gaming question will be called in that period, but I think it’s probably less likely rather than more likely.”  At the state level, we do see some movement in the right direction with 10 states attempting to legalize some form of online gambling, but without a federal bill, the economics don’t work very well – liquidity (number of players and availability of tables/games) is one of the most important factors in choosing an online casino. 

In the comp table below, it should be pretty clear that CZR is valued well above the regional peer group (3 multiples higher than the average on an EV/EBITDA basis) despite middle-of-the-pack EBITDA margins and the only declining sales base of its peer group (-4% CAGR from 2007 to 2012E vs a range of 0 to +6% for the peer group).  I have not included Las Vegas Sands (LVS), MGM Resorts (MGM) or Wynn International (WYNN) in the comps as this group has significant exposure to the fast growing Macao gaming market. 

The bottom table shows a simplified capital structure, pro forma for the sale of Harrah’s St Louis.  Liquidity is ample, and again, there are no significant maturities until 2015 – this is not an imminent bust, rather a slow but steady erosion of equity that accelerates as we get closer to 2015.  A nice paired long might be the CMBS securities themselves with a 16% yield to maturity.  While these bonds may be impaired, I believe TPG and Apollo could come up with another creative solution involving coupon step-ups, asset sales and equity issuance that are favorable to the CMBS and detrimental to the common equity

 

Caesars Entertainment Corp (CZR) Simple Model ($mm)

 

INCOME STATEMENT

2011

2012E

2013E

2014E

Property EBITDA

 

 

 

 

 

Las Vegas

 

 

824

800

850

950

Atlantic City

 

278

275

260

260

Louisiana/Mississippi

230

235

240

245

Iowa/Missouri

 

230

190

160

170

Illinois/Indiana

 

227

230

235

240

Other Nevada

 

89

85

87

90

Managed, intl, online, etc

138

240

270

330

Property EBITDA

 

2,017

2,055

2,102

2,285

 

 

 

 

 

 

 

Corp expenses/other

-74

-90

-90

-90

Adjusted EBITDA

 

1,943

1,965

2,012

2,195

 

 

 

 

 

 

 

D&A

 

 

869

897

914

929

Other operating expense

79

80

80

80

EBIT

 

 

995

988

1,018

1,186

 

 

 

 

 

 

 

Interest expense

 

2,122

2,100

2,050

2,050

Other expense

 

25

30

30

30

EBT

 

 

-1,153

-1,142

-1,062

-894

 

 

 

 

 

 

 

Tax rate

 

 

44%

35%

35%

35%

Income tax

 

-507

-400

-372

-313

Minority interest

 

21

21

19

16

 

 

 

 

 

 

 

Net income

 

-667

-763

-710

-597

Diluted shares out

 

125

125

125

125

EPS

 

 

-5.33

-6.09

-5.66

-4.77

 

CASH FLOW STATEMENT

2011

2012E

2013E

2014E

Adjusted EBITDA

 

1,943

1,965

2,012

2,195

Less cash interest

 

-1,720

-1,760

-1,775

-1,800

Less cash taxes

 

3

50

-27

-23

Less increase in WC

 

-26

-90

-50

-50

Less other

 

-77

0

0

0

Cash flow from operations

123

165

160

322

 

 

 

 

 

 

 

Less capex

 

-283

-550

-350

-300

 

 

 

 

 

 

 

Free cash flow

 

-160

-385

-190

22

 

 

 

 

 

 

 

Less other investments/sales

-734

610

0

0

Plus increase in equity

0

0

0

0

Plus increase in debt

812

100

0

0

 

 

 

 

 

 

 

Net change in cash

 

-82

325

-190

22

Ending cash

 

905

1,230

1,040

1,062

 

 

 

 

 

 

 

CREDIT STATS

 

2011

2012E

2013E

2014E

Cash

 

 

905

1,230

1,040

1,062

Total debt

 

19,800

19,900

19,900

19,900

Net debt

 

 

18,895

18,670

18,860

18,838

 

 

 

 

 

 

 

EBITDA/cash interest

1.1X

1.1X

1.1X

1.2X

EBITDA-capex/cash interest

1.0X

0.8X

0.9X

1.1X

Net debt/EBITDA

 

9.7X

9.5X

9.4X

8.6X

 

Caesars Entertainment Corp (CZR) Comps

 

 

 

 

 

 

Ticker

Price

EV ($mm)

EBITDA mgn (LTM '12)

Sales CAGR FY07-FY12E

EV/ EBITDA (FY12E)

EV/ EBITDA (FY13E)

Net debt/ EBITDA (FY13E)

 

CZR

5.79

20,376

23%

-4%

10.2X

9.5X

9.2X

 

ASCA

18.15

2,385

28%

2%

6.7X

6.7X

5.0X

 

BYD

5.52

3,825

18%

4%

8.1X

7.8X

6.8X

 

ISLE

5.93

1,272

20%

0%

6.5X

6.0X

4.9X

 

PENN

39.85

4,950

25%

4%

6.5X

5.4X

2.1X

 

PNK

12.83

2,095

22%

6%

7.0X

6.5X

4.0X

 

 

 

2,906

22%

3%

7.0X

6.5X

4.6X

 

                         

 CZR Capitalization and Liquidity as of 9/30/12 (PF)

 

Debt

 

 

 

 

Revolver ($1.08B base)

 

0

First lien term debt

 

 

6,197

2nd lien, other secured debt

 

7,614

CMBS

 

 

 

4,825

Total secured debt

 

 

18,635

 

 

 

 

 

Senior unsecured debt

 

1,324

Total debt

 

 

19,959

 

 

 

 

 

Liquidity

 

 

 

 

Unrestricted cash

 

 

1,189

Total cash

 

 

1,189

 

 

 

 

 

Revolver base

 

 

1,080

Less L/Cs

 

 

 

-98

Less amounts outstanding

 

0

Revolver availability

 

982

Total liquidity

 

 

2,172

RISKS:

The biggest risk to the short case is federal legalization of online poker.  Caesars is in a great position with its World Series of Poker brand name, deep customer database and significant head start in the segment.  Other risks are a strong recovery in Las Vegas and/or Atlantic City, with the combined regions contributing over 50% of company-wide EBITDA. 

 

 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Any hint of selling by the sponsors and/or Paulson & Co will be negative for the stock due to the thin liquidity created by the IPO. There has been little selling pressure since the 180 day lockup period expired, perhaps due to hopes of a better stock price. The more definitive catalyst is the refinancing of the CMBS debt which will inevitably involve significant dilution to the equity. A simple refinancing at anywhere near the current yield of 16% would result in an accelerated cash drain. Any future property sales are likely to come at multiples well below that of the parent company, putting further pressure on the equity.
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    Description

    ** Please note ** The write-up was completed prior to Hurricane Sandy and does not factor potential shortfall to financial results from further weakness in the Atlantic City gaming market. Also, CZR announced earnings on October 31, which does not change the thesis of this idea.
     

    RECOMMENDATION:

    I am recommending a short position in the common stock of Caesars Entertainment Corp (ticker CZR).  I believe this is an unsustainable capital structure, and while the company has so far been successful in delaying its day of reckoning through creative exchange offers, debt for equity swaps, and an amend and extend transaction involving its credit facility, the market is slowly but surely realizing that there is simply no equity value in this company.  I think the company will be forced to materially dilute its stock in order to stave off a forced bankruptcy with its enormous 2015 maturity wall looming. 

    Net debt, pro forma for the sale of Harrah’s St Louis casino ($610M in proceeds), stands at $18.8B, and the company has seen its EBITDA decline from a peak of $2.8B in 2007 (coincident with the ill-fated LBO) to a current run-rate of around $2.0B (9.4X leverage).  The Achilles heel of this story is a remnant of the original LBO: $4.8B of its debt sits in the CMBS subsidiary (“PropCo”).  This debt bears interest at 3.3% (L+300) which allows the entity to generate free cash flow estimated at about $250M annually at the current run-rate which can partially fund cash operating deficits at the “OpCo” subsidiary Caesars Operating Company (“CEOC”), in turn estimated at about $600M annually.  This CMBS debt currently trades at the high 70s for a yield to maturity in February 2015 of roughly 16%, partly due to the high leverage (net debt/EBITDA of nearly 10.5X at “OpCo”).  Free cash flow at PropCo would be wiped out at an interest rate of just 8%.  The CMBS loans have been syndicated and require unanimous consent to be refinanced and must be done as an entire package. 

    Caesars’ sponsors Apollo and TPG have done a nice job kicking the can down the road, but I believe the buck stops in 2015, and Caesars’ common equity will be sacrificed or at a minimum heavily diluted in every imaginable scenario.  As for timing, I believe CEO Gary Loveman does not want to leave this to the 11th hour, so we could see another large debt for equity swap sometime in 2013. 

    BUSINESS BACKGROUND:

    Caesars Entertainment Corp, formerly Harrah’s Entertainment, is the country’s largest regional gaming operator with 53 casinos owned, operated or managed in 12 US states and 7 foreign countries.  In the US, the casinos mainly operate under the Caesars, Harrah’s and Horseshoe brands.  The company also owns and operates several thoroughbred racetracks, including Bluegrass Downs and Turfway Park in Kentucky, and Thistledown Racetrack in Ohio.  The company has a growing presence in the online gaming market through its Caesars Interactive Entertainment (CIE) subsidiary.  CIE offers real-money gaming in the UK, France and Italy, as well as social and mobile gaming through its Playtika brand which was acquired in December 2011.  CIE owns the World Series of Poker brand which offers real-money land-based tournaments, and will be used to promote its online platform upon legalization in the US. 

    Caesars was taken private in January 2008 by a consortium led by TPG and Apollo for $31B ($6B of equity put in).  The recession took a toll on the company, and it was forced to enter a series of distressed debt for equity exchanges with holders of the LBO debt.  In February 2012 the company did an IPO at $9.00 per share, raising just $19M.  The company currently has 125M shares outstanding of which Apollo/TPG own 70%, and Paulson & Co own 10%.  All of Paulson’s shares (10%) plus another 9% were immediately tradeable after the IPO (and have not been sold down per public filings) and a final 9% piece became tradeable after a 180-day lockup expired on August 5, 2012.  On March 15, 2012, Caesars filed an S-3 enabling it to sell $500M in primary shares in a public offering.  As the current market cap is roughly $730M, this would be 68% dilutive. 

    Las Vegas (40% of LTM EBITDA):  Caesars has the second largest footprint on the Las Vegas Strip behind MGM with over 23K hotel rooms (25% market share behind MGM’s 44%), 9,500 slots and 880 table games.  Overall Las Vegas gaming revenue peaked in 2007 at $6.8B and after troughing at $5.6B in 2009 is running at about $6.0B currently.  This segment includes Caesars Palace, Bally’s Las Vegas, Flamingo Las Vegas, and Planet Hollywood Resort & Casino, among others.  The company expanded Caesars Palace in early 2012 through the addition of Octavius Tower (incremental $40M in EBITDA expected vs $120M construction cost) and plans on opening a new outdoor retail, dining and entertainment corridor called Project Linq in mid 2013, adding up to $100M in incremental EBITDA by 2014 vs a project cost of $520M.  LTM EBITDA for this segment of about $810M is down 30% from peak levels in 2007.

    Atlantic City (13% of LTM EBITDA):  Caesars has a 40% share of the Atlantic City market, which has declined from $5.2B in gaming revenue in 2006 to $3.2B at the current run-rate.  This segment includes Harrah’s AC, Showboat AC, Bally’s AC, Caesars AC and Harrah’s Philadelphia.  Rising competition from Pennsylvania, Delaware and New York, and the recent opening of the competing Revel casino have put tremendous pressure on this division of Caesars, and while the company has stemmed some of the bleeding through aggressive cost-cutting efforts, LTM EBITDA of $280M is down 55% from peak levels in 2007 and the outlook from here is pretty dim. 

    Regional Markets (37% of LTM EBITDA):  Caesars divides its other gaming jurisdictions into 4 other regions: Louisiana/Mississippi (12%), Iowa/Missouri (10%), Illinois/Indiana (11%), and Other Nevada (4%).  Louisiana/Mississippi is facing increased competition from Oklahoma-based Native American casinos, as well as new entrants along the Gulf Coast.  Iowa/Missouri is losing a third of its EBITDA due to the sale of Harrah’s St Louis to Penn National Gaming.  Penn just opened Hollywood Casino in Kansas City, the first expansion in that market in several years – this could be a problem for Caesars.  Illinois/Indiana also faces increased competition particularly from the launch of a city-owned casino in Chicago.  In addition a new casino near O’Hare airport opened last year and has already begun to impact Caesars’ Horseshoe Hammond casino.  Finally, Other Nevada faces increased competition from Native American properties in California.  Offsetting these competitive pressures, Caesars does have a decent pipeline of development projects in Ohio and Baltimore.  LTM EBITDA from the whole group at about $750M is down 25% from peak levels in 2007. 

    Managed, International, Other (10% of EBITDA): Caesars manages the operations of 3 Native American casinos in the US: Harrah’s Ak-Chin in Arizona, Harrah’s Cherokee in North Carolina and Harrah’s Rincon in California.  This segment also includes the company’s international assets.  Caesars owns and manages the Conrad Punta del Este in Uruguay, owns the Caesars Windsor in Canada, and owns, operates or manages 13 hotels and casinos across the UK, Egypt and South Africa, collectively known as London Clubs International.  Caesars Interactive Entertainment results are also reported in this segment.  This segment is the growth driver of the company.  With Horseshoe Cleveland and Horseshoe Cincinnati added to the mix in 2012 and 2013, respectively, and good growth in online and social gaming from the Playtika acquisition, EBITDA could grow from $140M in 2011 to over $300M in 2014.

    MODEL, VALUATION:

    Below I’ve laid out a simplified consolidated model of Caesars Entertainment Corp from the perspective of the parent company.  Note that Caesar’s principal operating subsidiary is CEOC, which operates all of the company’s properties except the CMBS properties in Nevada (Rio, Flamingo, Harrah’s Las Vegas, Paris, and Harrah’s Laughlin) and the company’s interactive division CIE.  Of the roughly $2.0B in EBITDA expected at the consolidated level in 2012, $450M will come from PropCo (the CMBS properties) with the remaining $1.5B from OpCo (CEOC) and CIE.  CEOC’s credit facility has a covenant requiring that Caesars maintain a 4.75X first lien net debt/LTM adjusted EBITDA ratio (currently we’re at about 4.3X – not a lot of breathing room).  In addition, funds raised from asset sales from within the restricted group of properties within CEOC must be reinvested within the restricted group within 15 months of the sale.  Harrah’s St Louis was part of this restricted group.  As this was sold at a EV/EBITDA of 7.8X, it was a leveraging transaction (EV/EBITDA for Caesars is 10.2X).  Most assets that the company might consider selling would result in leveraging events. 

    What I’d like to stress is that even using fairly generous assumptions (I assume good growth in the Las Vegas segment and in the Managed, International, Online & Other segment) the company will be loss-making through 2014 (right up to the $8B Maturity Wall).  The one call option that could potentially give new life to Caesar’s equity is legalization of online gaming in the US.  However in response to a question on the last conference call, the CEO said “I’m not terribly optimistic.  I think it’s possible but I think there are some very pressing issues for the country’s finances that remain in front of the Congress in the lame duck session, and surely we all hope that they get attention.  It’s possible that the online gaming question will be called in that period, but I think it’s probably less likely rather than more likely.”  At the state level, we do see some movement in the right direction with 10 states attempting to legalize some form of online gambling, but without a federal bill, the economics don’t work very well – liquidity (number of players and availability of tables/games) is one of the most important factors in choosing an online casino. 

    In the comp table below, it should be pretty clear that CZR is valued well above the regional peer group (3 multiples higher than the average on an EV/EBITDA basis) despite middle-of-the-pack EBITDA margins and the only declining sales base of its peer group (-4% CAGR from 2007 to 2012E vs a range of 0 to +6% for the peer group).  I have not included Las Vegas Sands (LVS), MGM Resorts (MGM) or Wynn International (WYNN) in the comps as this group has significant exposure to the fast growing Macao gaming market. 

    The bottom table shows a simplified capital structure, pro forma for the sale of Harrah’s St Louis.  Liquidity is ample, and again, there are no significant maturities until 2015 – this is not an imminent bust, rather a slow but steady erosion of equity that accelerates as we get closer to 2015.  A nice paired long might be the CMBS securities themselves with a 16% yield to maturity.  While these bonds may be impaired, I believe TPG and Apollo could come up with another creative solution involving coupon step-ups, asset sales and equity issuance that are favorable to the CMBS and detrimental to the common equity

     

    Caesars Entertainment Corp (CZR) Simple Model ($mm)

     

    INCOME STATEMENT

    2011

    2012E

    2013E

    2014E

    Property EBITDA

     

     

     

     

     

    Las Vegas

     

     

    824

    800

    850

    950

    Atlantic City

     

    278

    275

    260

    260

    Louisiana/Mississippi

    230

    235

    240

    245

    Iowa/Missouri

     

    230

    190

    160

    170

    Illinois/Indiana

     

    227

    230

    235

    240

    Other Nevada

     

    89

    85

    87

    90

    Managed, intl, online, etc

    138

    240

    270

    330

    Property EBITDA

     

    2,017

    2,055

    2,102

    2,285

     

     

     

     

     

     

     

    Corp expenses/other

    -74

    -90

    -90

    -90

    Adjusted EBITDA

     

    1,943

    1,965

    2,012

    2,195

     

     

     

     

     

     

     

    D&A

     

     

    869

    897

    914

    929

    Other operating expense

    79

    80

    80

    80

    EBIT

     

     

    995

    988

    1,018

    1,186

     

     

     

     

     

     

     

    Interest expense

     

    2,122

    2,100

    2,050

    2,050

    Other expense

     

    25

    30

    30

    30

    EBT

     

     

    -1,153

    -1,142

    -1,062

    -894

     

     

     

     

     

     

     

    Tax rate

     

     

    44%

    35%

    35%

    35%

    Income tax

     

    -507

    -400

    -372

    -313

    Minority interest

     

    21

    21

    19

    16

     

     

     

     

     

     

     

    Net income

     

    -667

    -763

    -710

    -597

    Diluted shares out

     

    125

    125

    125

    125

    EPS

     

     

    -5.33

    -6.09

    -5.66

    -4.77

     

    CASH FLOW STATEMENT

    2011

    2012E

    2013E

    2014E

    Adjusted EBITDA

     

    1,943

    1,965

    2,012

    2,195

    Less cash interest

     

    -1,720

    -1,760

    -1,775

    -1,800

    Less cash taxes

     

    3

    50

    -27

    -23

    Less increase in WC

     

    -26

    -90

    -50

    -50

    Less other

     

    -77

    0

    0

    0

    Cash flow from operations

    123

    165

    160

    322

     

     

     

     

     

     

     

    Less capex

     

    -283

    -550

    -350

    -300

     

     

     

     

     

     

     

    Free cash flow

     

    -160

    -385

    -190

    22

     

     

     

     

     

     

     

    Less other investments/sales

    -734

    610

    0

    0

    Plus increase in equity

    0

    0

    0

    0

    Plus increase in debt

    812

    100

    0

    0

     

     

     

     

     

     

     

    Net change in cash

     

    -82

    325

    -190

    22

    Ending cash

     

    905

    1,230

    1,040

    1,062

     

     

     

     

     

     

     

    CREDIT STATS

     

    2011

    2012E

    2013E

    2014E

    Cash

     

     

    905

    1,230

    1,040

    1,062

    Total debt

     

    19,800

    19,900

    19,900

    19,900

    Net debt

     

     

    18,895

    18,670

    18,860

    18,838

     

     

     

     

     

     

     

    EBITDA/cash interest

    1.1X

    1.1X

    1.1X

    1.2X

    EBITDA-capex/cash interest

    1.0X

    0.8X

    0.9X

    1.1X

    Net debt/EBITDA

     

    9.7X

    9.5X

    9.4X

    8.6X

     

    Caesars Entertainment Corp (CZR) Comps

     

     

     

     

     

     

    Ticker

    Price

    EV ($mm)

    EBITDA mgn (LTM '12)

    Sales CAGR FY07-FY12E

    EV/ EBITDA (FY12E)

    EV/ EBITDA (FY13E)

    Net debt/ EBITDA (FY13E)

     

    CZR

    5.79

    20,376

    23%

    -4%

    10.2X

    9.5X

    9.2X

     

    ASCA

    18.15

    2,385

    28%

    2%

    6.7X

    6.7X

    5.0X

     

    BYD

    5.52

    3,825

    18%

    4%

    8.1X

    7.8X

    6.8X

     

    ISLE

    5.93

    1,272

    20%

    0%

    6.5X

    6.0X

    4.9X

     

    PENN

    39.85

    4,950

    25%

    4%

    6.5X

    5.4X

    2.1X

     

    PNK

    12.83

    2,095

    22%

    6%

    7.0X

    6.5X

    4.0X

     

     

     

    2,906

    22%

    3%

    7.0X

    6.5X

    4.6X

     

                             

     CZR Capitalization and Liquidity as of 9/30/12 (PF)

     

    Debt

     

     

     

     

    Revolver ($1.08B base)

     

    0

    First lien term debt

     

     

    6,197

    2nd lien, other secured debt

     

    7,614

    CMBS

     

     

     

    4,825

    Total secured debt

     

     

    18,635

     

     

     

     

     

    Senior unsecured debt

     

    1,324

    Total debt

     

     

    19,959

     

     

     

     

     

    Liquidity

     

     

     

     

    Unrestricted cash

     

     

    1,189

    Total cash

     

     

    1,189

     

     

     

     

     

    Revolver base

     

     

    1,080

    Less L/Cs

     

     

     

    -98

    Less amounts outstanding

     

    0

    Revolver availability

     

    982

    Total liquidity

     

     

    2,172

    RISKS:

    The biggest risk to the short case is federal legalization of online poker.  Caesars is in a great position with its World Series of Poker brand name, deep customer database and significant head start in the segment.  Other risks are a strong recovery in Las Vegas and/or Atlantic City, with the combined regions contributing over 50% of company-wide EBITDA. 

     

     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Any hint of selling by the sponsors and/or Paulson & Co will be negative for the stock due to the thin liquidity created by the IPO. There has been little selling pressure since the 180 day lockup period expired, perhaps due to hopes of a better stock price. The more definitive catalyst is the refinancing of the CMBS debt which will inevitably involve significant dilution to the equity. A simple refinancing at anywhere near the current yield of 16% would result in an accelerated cash drain. Any future property sales are likely to come at multiples well below that of the parent company, putting further pressure on the equity.

    Messages


    SubjectOnline gaming, and ZNGA departures
    Entry11/14/2012 03:27 PM
    Memberelehunter
    As mentioned above, the key risk to the short is legalization of online poker.  One company which is staking its survival in part on this same call option is Zynga.  The company recently announced an exclusive partnership with bwin.party to offer real money online poker and casino games in the UK market, presumably to get a foot in the door ahead of US legalization of real money online poker.  Yesterday's news of CFO David Wehner moving to Facebook was one of literally 18 executive departures since March.  Among them, Laurence Toney, General Manager of Zynga Poker, and Jeremy Strauser, Studio General Manager of Zynga Elite Slots and Zynga Bingo, suggest the bridge from "fake" money online gaming to "real" money online gaming in the US is either not happening at all or not happening fast enough to save this company. 
     
    Granted I don't follow Zynga closely enough to make a call on whether its bread and butter online social games are in such dire straits that nothing will save this company, but I think the departure of Zynga executives who have front row seating into the future of real money online gaming lends support to the short thesis on CZR.

    SubjectRE: RE: Online gaming, and ZNGA departures
    Entry11/19/2012 03:22 PM
    Memberavahaz
    your reply seems to imply that it is a foregone conclusion that pokerstars will get a license to relaunch in the US when legislation is passed while the reality is quite the opposite. Current draft legislation specifically blocks pokerstars from receiving a license for the first five or six ears

    SubjectRE: RE: RE: Online gaming, and ZNGA departures
    Entry11/20/2012 06:54 PM
    Memberavahaz
    I recently attended a meeting with pokerstars' in house counsel and it was very clear that they know that they will face a major uphill battle to get licensed in the US and that if they ever do it will be long after the everyone else as it would have to go via the courts...that said, Reid will very likely fail but state by state is happening...not sure how CZR is positioned for that 

    SubjectRE: Quick question
    Entry11/29/2012 05:52 PM
    Memberelehunter
    The PENN transaction works because a) there is actual taxable income to shield and b) PENN's 2012 EV/EBITDA multiple was significantly lower than that of REITs (7X pro forma pre-announcement vs 11-17X).  Most REIT investors would argue that PENN's propco (and that of any gaming company) will be a low quality triple net lease REIT that should be valued closer to the low end of comps (11-12X) so the upside to CZR's 10X (which is generous itself) is low, even if magically this transaction is possible.  
     
    Then there's the issue of taxable income. As mentioned in my write-up, CZR's propco is currently (and for the foreseeable future) funding losses at the opco.  To turn the propco into a REIT as PENN did means the cash flow (AFFO in REIT methodology), will be redirected towards dividends (PENN's target payout ratio is 80% AFFO, which helps justify the higher multiple).   This will most certainly violate the restricted payments test, not to mention the limitation on sale-and-leasebacks.  As PENN is doing, I think CZR would have to somehow refinance the entire capital structure to convert to a REIT.  PENN only had to get Fortress to agree to this structure (which itself was an expensive proposition) whereas CZR has TPG, Apollo, Paulson and several other hedge funds to contend with.  Payoffs like the Fortress payoff would certainly be leveraging events, and CZR's credit facility (at opco) has a covenant requiring that Caesars maintain a 4.75X first lien net debt/LTM adjusted EBITDA ratio - we're at 4.3X now, so it won't take much to trip that as well.
     
    This little bounce on the PENN transaction is a perfect short setup in my opinion. 

    SubjectRE: CIE Spin
    Entry11/30/2012 11:14 AM
    Memberelehunter
    Yes I believe this was set up structurally so that a spin out of CIE could happen if online gaming were to take off.  The bigger question of course is whether you think online gaming will be legalized in the US (at the federal level) before CZR runs out of time. 

    SubjectLegalized online gaming
    Entry02/08/2013 05:03 PM
    Membermm202
    Any thoughts on this and how it impacts CZR?  Obviously there are a lot of potential players in this space, but maybe there are barriers through gaming licenses that would stand to benefit CZR more than others.  Big news it would appear, but CZR has already had a monster run since you recommended the short.  
     

    Boyd Gaming (NYSE: BYD), Caesars Entertainment (Nasdaq:CZR), and Zynga (Nasdaq: ZNGA) popped higher this afternoon following reports that New Jersey governor Chris Christie may be in support of online gaming.

    According to Dow Jones headlines, Christie asked for minor changes to a bill allowing online gambling. Any support for Christie may make New Jersey one of the first states to legalize the measure.

    UPDATE - Christie sent the bill back to lawmakers with changed, which included placing a 10-year trial period into the law. He rejected an earlier bill in March 2011, saying it wouldn't contribute to an Atlantic City revival.

    With New Jersey facing six-straight years of declining revenue, Christie -- who is a first-term Republican looking for re-election -- is pulling out all the stops to turn around the state's fortunes.

    Senator Raymond Lesniak sponsored the initial bill and believes it will be "wildly successful," bringing in millions of dollars to the state. He expects changes to be approved by the Assembly this month and the Senate in March, Bloomberg noted today.

    State that currently allow Internet betting include Nevada and Delaware. Mississippi, California, and Hawaii lawmakers are also seeking approval.

    Since 2007, revenue in Atlantic City has been on a downtrend. Neighboring Pennsylvania passed the one-time mecca as second-largest gaming spot in the U.S. behind Las Vegas with revs of $3.16 billion in 2012.

    Shares of Boyd are up 5.6, Caesars is up 7.8, and Zynga is 1 percent better Thursday.

    SubjectRE: RE: RE: CIE Spin
    Entry02/08/2013 11:49 PM
    Membermrsox977
    more on this
     

    Caesars Growth Venture Partners

    CEC is pursuing a strategic transaction that contemplates the transfer of certain of its assets that are not part of the collateral package for the notes, including unencumbered assets of CEC and unrestricted subsidiaries of CEOC, to a newly created entity, named Caesars Growth Venture Partners (“CGVP”), which is anticipated to be controlled by common parties that control CEC. CGVP would be a growth oriented vehicle focused on projects that are complementary to CEC’s existing properties. We anticipate that CEC would own a significant portion of CGVP’s equity interests and that subsidiaries of CEC would manage new casino properties owned by CGVP. We are pursuing this transaction because we believe it will improve our liquidity and credit profile, enhance our distribution network and provide additional support for potential new ventures. It is currently contemplated that the following assets would be transferred: (i) Planet Hollywood, (ii) investment in a casino project under development in Baltimore, Maryland, (iii) interest in a portion of the management fee revenues of the management companies for Planet Hollywood and the casino to be developed in Baltimore, Maryland, (iv) shares of Caesars Interactive Entertainment, Inc.’s outstanding common stock held by HIE Holdings, Inc., a subsidiary of CEC, and (v) approximately $1.1 billion face value of senior notes issued by CEOC held by Harrah’s BC, Inc. It is anticipated the Sponsors would participate in the transaction and that CEC’s other shareholders would have the opportunity to participate on the same terms. The form of consideration to CEC is expected to be stock and cash, and any consideration to CEOC is expected to be cash, in each case at fair value. There is no current intention that this transaction will involve CEC’s outstanding CMBS financing. There are no commitments with respect to any such transaction and there have been no agreements with respect to price or value. The transfer of such assets would require the approval of regulators and other third parties, which we may not be able to obtain. Therefore, we cannot assure you that any such transaction will be entered into or consummated or, if consummated, describe the impact the transaction would have on us.


    SubjectRE: Legalized online gaming
    Entry02/11/2013 11:45 AM
    Memberelehunter
    I'm still struggling to understand how there's any equity value here but the risk of bankruptcy risk is now pretty clearly mitigated.  Post the $1.5B add-on to the 9% sr secured notes, the opco will have $2.6B in cash on hand.  There is still $4.7B in CMBS maturing in 2015, but refinancing is now looking more feasible.  As for online gaming, Christie has clearly thrown CZR a bone, but for the economics to really work, we need a federal law, still years away.  The positive sentiment has done a nice job forcing a short squeeze, but this is still a house of cards with negative equity value in most scenarios that I can see. 

    SubjectDistressed debt exchange coming next year
    Entry11/01/2013 02:03 PM
    Memberelehunter
     
    I'm still scratching my head on this one.  If there's equity value in a company that can't even cover its interest expense with EBITDA (which is at best flatlining at $1.9B), has working capital of $620M vs a $790M bond maturity in 19 months, is burning cash at $200M per quarter, and whose majority equity owners are talking to bondholders about a distressed debt for equity exchange, I've got a bridge to sell.  This is an unsustainable capital structure and the obvious fix involves wiping out all of the existing equity to zero. 
     
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