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Caesars Gains on New Project Venture

The Deal

04/24/13 - 11:58 AM EDT

NEW YORK ( TheDeal) -- Caesars Entertainment Corp. (CZR) extended its 2013 surge as the casino operator said this week it may raise as much as $1.2 billion through a venture unit to finance new projects.

Caesars added 0.4% in New York to $15.97, to extend its 2013 advance to 131%.

Las Vegas-based Caesars operates resorts under the Harrah's, Caesars and Horseshoe brand names, and also owns the World Series of Poker and the London Clubs International family of casinos. Hampered by debt of roughly $20 billion, Caesar's posted adjusted Ebitda of $1.94 billion on net revenue of $8.59 billion in 2012, little changed from the previous year.

Private equity firms TPG Capital and Apollo Global Management LLC, which acquired Caesars in January 2008 in a deal valued at $30.7 billion, including $12.4 billion in debt, hold a 69.9% stake in the company. They expect to inject as much as $500 million into the new unit.

What Caesars is doing with this transaction, according to analysts, is to raise money for operations and expansion, rather than to get out from under its $20 billion debt burden.

Instead, the proceeds will be used to "extend its liquidity out a couple of years," CreditSights Inc. senior analyst Chris Snow said.

Roth Capital Partners LLC managing director Eric Rindahl agreed, saying that the new growth company is not meant to reduce Caesars' outstanding debt but to expand the parent company so it can keep up with competition.

"This is not meant to delever Caesars," Rindahl said. "This allows the owners of Caesars to use capital to make new investments without paying down debt. Caesars has to invest to survive."

Caesars' debt-to-Ebitda stands at about 13.6 times, according to Moody's Investors Service.

To that end, Caesars is selling various assets to the new entity, including a stake in Internet gambling unit Caesars Interactive Entertainment Inc. It is selling stakes in Planet Hollywood Resort & Casino in Las Vegas and the Horseshoe Baltimore casino project, which is in development, as well as a stake in the management fee for these two properties to Caesars Growth Partners, and is also contributing $1.1 billion of senior notes issued by subsidiary Caesars Entertainment Operating Co. The total value of these assets is about $1.6 billion, according to regulatory filings.

In addition, Caesars said it will take a stake of between 57% and 77% in Caesars Growth, depending on how many other shareholders buy into the new company, selling the remainder to the vehicle formed by PE sponsors TPG and Apollo.

Caesars' debt burden, which is mainly carried by subsidiaries, is weighing on the company's credit ratings. On April 5, Moody's downgraded Caesars ratings to Caa2 from Caa1. It also chopped the ratings of CEOC's first-lien debt to B3 from B2, its second-lien debt to Caa3 from Caa2, and its unsecured guaranteed notes and unsecured notes both to Ca from Caa3. The rating outlook is negative.

"The downgrade of Caesars' ratings considers that its same store Ebitda growth in 2012-2013 has failed to materialize to any significant degree, and so Caesars' credit metrics have deteriorated and its free cash flow deficit will be higher than Moody's previous expectations," Moody's analyst Peggy Holloway wrote in a note. She added that Caesars has experienced a continuation of negative gaming revenue trends so far in 2013 across most of the company's major markets, as a longer-lasting rebound in gaming demand has been derailed again, this time by higher taxes that are reducing consumers' discretionary income.

Nevertheless, the cash injection from the newly formed entity could help alleviate the projected cash burn rate -- a rate that Moody's estimates at $300 million of its cash on hand plus capital expenditures in 2013, assuming flat Ebitda, slightly higher cash interest and required debt amortization of about $170 million.

Caesars went public in February 2012, raising $16.3 million at $9 per share.

Written by Taina Rosa in New York


Brokerage Partners