Wait for Caesars to Offer Better Odds

NEW YORK ( TheStreet) -- Caesars Entertainment ( CZR) continues to climb higher Thursday after surging over 13% overnight from its prospectus filing to split assets. The company intends to issue rights to purchase part of the spin-off.

Caesars, the iconic name that includes 52 land- and water-based casinos in seven countries hasn't fared well since the economic downturn. Each quarter, the earnings report emulates the joy of a seven rolled after establishing your number. The casino's current objective is to raise up to $1.18 billion for its developing online gaming enterprise by issuing up to 125.3 million shares of common stock upon exercise of rights at $9.43 a share.

Specifically, the filing states the funds will be used for: "...in the pursuit of high return, capital intensive investment opportunities in land-based casino gaming, regulated online real-money gaming, and social and mobile games. Many development projects in the land-based casino and entertainment industries require lengthy and involved development and regulatory processes and therefore often require a significant initial capital outlay but have delayed cash flows generated from operations. Growth Partners' capital structure is specifically designed to accommodate these dynamics, and we believe Growth Partners' streamlined business model will create a unique venture-oriented investment vehicle for potential equity investors."

The market's reaction is unmistakably positive, but I'm not fully convinced. Why raise capital to expand into new areas if you can't produce a profit in your core market? I understand the perils of missing out on first-mover advantage with the Internet, but that's not always an advantage. Take MySpace and Yahoo! ( YHOO) as examples.

Both of these websites were first on the scene with first-mover advantage. Facebook ( FB) wasn't first, but went on to become the number one and dominate "their space." Yahoo! was the number one search portal until Google ( GOOG) came along and showed the world a better way to search, advertise, and market products. The bottom line is better beats first, especially when all the competitors are highly skilled and well financed.

You can spend only so much money on a website before improvements aren't cost effective. Spending $50 million on a website isn't likely to achieve a better experience than one built with $10 million. In other words, go ahead and build a fantastic website, but show you can win at the table you're playing at before moving up to a higher-stakes game. To gain a better understanding of the overall landscape, it may be helpful to review the players in the transaction. Apollo Global Management ( APO), is Caesars most influential shareholder.

Interestingly, Apollo's shares didn't immediately increase after the announcement. Caesars represents over $400 million of Apollo's $3.27 billion market cap. On the day of the announcement, Apollo closed slightly lower. On Thursday, the market figured it out, and Apollo was trading up over 3%.

Two other notable holders include Paulson & Co. and Soros Fund Management. Investors interested in buying will probably not want to forget who's the likely counterparty selling. Most people haven't found tremendous success as the counterparty to the above three big-money players.

Apollo stated it intends to invest at least $500 million into the newly split company, representing roughly 40% ownership. Compared to the current 70% ownership of Caesars, at $500 million, the offering represents a dilution of ownership for Apollo. No one is in a better position than it to evaluate the potential risks and rewards of splitting Caesars. If Apollo wants lower exposure, it sends a message you should pay close attention to.

With that said, I can envision Caesars growing, and widespread online gaming becoming a reality in the near future. I love the properties it owns, and when the economy recovers (and it will), it's well positioned to benefit. Time is on your side, and if you wait until the excitement to passes, you will have another chance to roll the dice, but at a price under $16.

At the time of publication, the author had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.