Caesars Surges on Merger with Sister Company as Casino Restructures

Caesars Entertainment Corp. (CZR)  was surging Monday after announcing it will merge with its Caesars Acquisition Co. (CACQ) unit in an all-stock transaction that will combine the two publicly-traded affiliates. Shares of the Las Vegas-based casino operator were climbing 15% to $15.55.

In a statement, Caesars said the merger will support the restructuring of the gaming giant's operating unit, Caesars Entertainment Operating Co. (CEOC), and improve the company's leverage and capital structure.

"Upon completion of the merger and [CEOC] restructuring, Caesars Entertainment Corp. entities will be financially strong, with significantly reduced leverage and a much simpler and straightforward corporate structure," Caesars Entertainment CEO Gary Loveman said in the statement.

The news boosted the stock prices of both merger parties. Caesars Entertainment's stock was up about 19% Monday to $16.07 with a $2.32 billion market cap after closing at $13.49 on Friday, while Caesars Acquisition was up nearly 9% to $10.26 with a $1.41 billion market cap, following a $9.46 close on Friday.

The merged company will operate as Caesars Entertainment and trade as CZR. It will have $1.7 billion in cash on its balance sheet, not counting the cash held by CEOC. According to the Monday statement, the merged company will produce positive free cashflow.

Caesars Entertainment shareholders will own 62% of the combined company while Caesars Acquisition investors will hold the remaining 38%, after each share of Caesars Acquisition class A common stock is exchanged for 0.664 share of Caesars Entertainment common stock.

Caesars Entertainment's private equity backers, Apollo Global Management LLC and TPG Capital, will retain control of the company. Those firms acquired a majority stake in Caesars Entertainment for $30.7 billion in 2008, and the company subsequently has struggled with its debt load.

Special committees of independent directors at Caesars Entertainment and Caesars Acquisition unanimously recommended the merger. If the transaction is completed, the combined company will own 11 properties in Las Vegas and also operate Caesars Palace. Additionally, it will own regional properties Harrah's New Orleans, Harrah's Atlantic City, Harrah's Laughlin, and Caesars Acquisition's current equity interest in Horseshoe Baltimore. It will also own a majority stake in Caears Interactive Entertainment Inc., an online gaming business.

Caesars Entertainment is being advised on the transaction by Centerview Partners LLC. The company is taking legal advice from a Reed Smith LLP team comprised of Howard Shecter, Glenn Mahone, Brian Miner, Ken Siegel, and Adam Cohen, and also by Paul, Weiss, Rifkind, Wharton & Garrison LLP's John Scott and Brian Finnegan.

Caesars Acquisition Co.'s financial adviser is Moelis & Co. LLC. It is taking legal advice from Skadden, Arps, Slate, Meagher & Flom LLP's Van Durrer II and Rodrigo Guerra, Jr., and Latham & Watkins LLP's Raymond Lin and Michael Treska.

Meanwhile, Caesars Entertainment is still working on restructuring CEOC. On Friday, it announced an agreement with members of a steering committee of first-lien bondholders that hinges on a Chapter 11 bankruptcy filing in mid-January. The restructuring would cut about $10 billion in debt from CEOC's balance sheet, as its $18.6 billion of outstanding debt would be exchanged for $8.6 billion in new debt. That move would cut CEOC's annual interest expense by 75%.

Under the plan, Caesars Entertainment would contribute up to $1.45 billion in cash.

On Dec. 15, CEOC missed interest payments totalling $225.3 million on its second-lien bonds, paving the way for a bankruptcy filing.

Under the terms of the planned restructuring, CEOC will be separated into two companies, an operating entity (OpCo) and a newly formed publicly traded REIT, or property company (PropCo).

— David Marcus and Jamie Mason contributed to this report.

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