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NEW YORK (
TheStreet) -- The epic rise of
Caesars Entertainment(CZR) shares -- and their subsequent fall after a February initial public offering -- is an early read on an investment boom that will connect private equity financiers with ordinary stock investors.
Private equity firms are expected to look at share sales like Caesars Entertainment as a way to begin exiting buyouts in coming years. Those soon to be public investments, and a string of recent multi-billion dollar IPO's, give investors a new set of stocks to pick over. But buyer beware those companies may increasingly be weighed down by their former owners.
Recently IPO'ed stocks like Caesars Entertainment have a private equity share overhang
When private equity firms
Apollo Global Management(APO) and
TPG Capital launched Caesars Entertainment onto public markets they likely didn't take a near doubling of the casino operator's shares to $15.39 as a big victory. That's because after trying for a $531 million IPO in November 2010, the buyout investors settled on an offering of just 2% of the company's shares, raising $16.9 million. While Apollo and TPG didn't sell shares in the offering and won't in a possible 34.7 million share follow up stock sale, their still giant stake in Caesars Entertainment is indicative of how large privately held share stakes can weigh on new offerings.
As big Caesars Entertainment investors eventually look to exit the troubled $27.8 billion 2006 buyout their share sales may pressure the company's stock, while the casino conglomerate's near $20 billion in debt raises the prospect of share dilution.
"In general, whenever you have a large private equity firm with a big stake, it's going to be an overhang on shares," says Morningstar gaming and lodging equity analyst Chad Mollman of the Caesars Entertainment offering. He adds that investors in capital raising offerings to lower debt, investors face the prospect of share dilution.
In initiating a "hold" rating and a $16 a share price target for Caesars Entertainment in a Tuesday report, Deutsche Bank analyst Carlo Santarelli noted "potential share sales by Apollo and TPG, their considerable control over the company, and the threat of further equity raises by CZR" as some of the gaming stock's main risks. Hamlet Holdings, the Caesars Entertainment ownership vehicle of Apollo and TPG, and hedge fund Paulson & Co. hold roughly 80% of the company's shares even after its IPO, according to
Overall, analysts give Caesars Entertainment shares a price target of $16.40, with two "buy" and "hold" ratings to go with a "sell." Caesars shares closed Tuesday trading at $12.99, putting its post-IPO drop at over 15%.
A recent spat between
Clear Channel Outdoor Holding(CCO) stock investors and the company's majority owners Bain Capital and THL Partners highlight other private equity industry techniques like dividend recapitalizations and complicated ownership structures that may come as a surprise to shareholders. For more the $17.9 billion buyout of the advertising and radio giant, see why
Ryan Seacrest may need to save Clear Channel.
While Caesars Entertainment's IPO is an extreme case of a now public stock with a potentially giant private equity overhang, it's an illustration of a trend to watch as once-private companies become increasingly available to stock investors.
Here's a look at
5 recently IPO'ed stocks that could face pressure if private equity shareholders were to look for a speedy exit. In 2011, private equity backed IPO's reached a post-crisis high of $38.6 billion, according to
Dealogic data, as firms used recovering stock markets to realize investments. In recent reports,
Alvarez & Marsal and
Bain & Co. expect private equity funds to further consider share sales as a way to return capital to investors in 5-10 year old funds.
For more on private equity investments, see
how a Texas billionaire and the U.S. Treasury won in a $1.5 billion bank sale and
10 once-bankrupt companies primed for a comeback.