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Wednesday, April 30, 2014

Betting on Casinos, Part II

Let's Take this Online

My last post discussed how the debt at Caesars operating company relates to the entity that carries the online gaming  business. In this post, I want to talk a little more about the online gaming business and how it specifically relates to Caesars. 

The Turnaround Management Association's January 2013 issue of Journal of Corporate Renewal was dedicated to managing casinos through a restructuring. It's worth a read in its entirety for those investors or professionals interested in the gaming industry. One of the interesting things discussed in that issue is the role of the legal system in online gambling. The article explains that both the Illegal Gambling Business Act and Unlawful Internet Gambling Enforcement Act are "inapplicable if a bet is not unlawful under federal law and the law of the state from which the wager was made and received." TMA

Apparently, the politics surrounding online gaming laws are pretty obfuscatory. Internet gaming is legal in Delaware and New Jersey, and Nevada only offers poker to its online customers. 

"At least 10 states are considering legalizing Internet gaming this year. Some are further along than others. Positive sentiment has been expressed in Massachusetts and Illinois statehouses, a poker-only bill was introduced in New York and California’s poker-only legislation is slowly moving forward." Las Vegas Review-Journal

"Las Vegas Sands Corp. Chairman Sheldon Adelson — who has vowed to dip deep into his heavy wallet and spend whatever it takes kill online wagering — funded the Coalition to Stop Internet Gambling. 

Not to be outdone, MGM Resorts International, Caesars Entertainment Corp. and the American Gaming Association are paying the bills for the pro-Internet gaming Coalition for Consumer and Online Protection. 

Apparently, some lobbyists sold themselves to the highest bidder.

As reported this month by political pundit Jon Ralston, Bono initially offered to work for Adelson’s side before joining the pro-online gaming forces. Meanwhile, Dickstein Shapiro, a large law firm with a lobbying component, initially pitched its services to Caesars before signing on with Adelson." Las Vegas Review-Journal
This sounds so Godfather-ish.

Okay so near-term prospects of legalizing online gaming don't look promising. 

Let's get back to Caesars. The gaming company was acquired by Apollo and TPG in January 2008. The funding for the acquisition resulted in $21 billion of debt at Caesars Entertainment Operating Company (CEOC). Then, in October 2013, the parent company of CEOC, Caesars Entertainment Corp (CZR), formed a joint venture Caesars Acquisition Company (CACQ) to form Caesars Growth Partners (CGP). Then, CZR contributed all of the shares of Caesars Interactive Entertainment (CIE) along with other assets to CGP in exchange for $360 million of proceeds. CIE has all the internet gaming assets. Here's another version of the company's capital structure. (Caesars Exchange Offer)

In the last post, I discussed the capital structure issues with investing in CZR, namely that parent still guarantees much of the debt, giving the guaranteed debt priority over the CZR stock in case of an operating company bankruptcy. CEOC was levered around 15x at the end of 2013 (Caesars supplemental financials). But what if you wanted to invest in CACQ stock as a way to have online gaming exposure?

According to the CGP Offering Memorandum dated April 10, 2014, CACQ has 42% of economic interest in CGP, which owns CIE. CZR has 52% of economic interest in CGP. CGP owns casinos Horseshoe Baltimore, Plante Hollywood, The Quad and Harrah's New Orleans. 

CACQ expects CGP annual adjusted run-rate EBITDA to be $287-320 million; 2013 adjusted EBITDA pro-forma for the transaction was $238 million. 

Debt at CGP the end of 2013 pro-forma for the transactions was around $2 billion, mainly comprised of $1.16 billion of terms loans, which are guaranteed by CACQ and most subsidiaries, and $675 million of unsecured debt. (Offering Memorandum). 

With a 42% share in debt and EBITDA of CGP, CACQ would be levered at about 6.7x, which doesn't sound so bad. But market cap of the stock is already $1.71 billion, making enterprise value roughly $2.5 billion (add 42% of debt, subtract 42% of cash to market cap), and EV/EBITDA multiple becomes closer to 20x. WYNN and LVS are around 15x and MGM is around 12x. So using the company's projected earnings and assuming steady debt, the stock looks pretty rich.


  1. This is probably one of the funniest things I've read in awhile. Gotta love/hate the guys that come up with this!

  2. I know! I saw that too :) I disagree with CZR on that one though.

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