The private equity owners behind Caesars Entertainment have been working overtime in their financial laboratory. Apollo Global Management and TPG are following last year’s microscopic initial public offering with a spinoff and rights issue concoction. Aiming to raise $1.2 billion, the complex transaction mostly seems designed to buy still more time for the ailing $31 billion leveraged buyout.
The casino empire may be out of textbook solutions. Shortly after going private in 2006, Caesars rejigged itself several times in a bid to reduce leverage. But it couldn’t keep pace with the Great Recession, which took a toll on Las Vegas. An I.P.O. attempt in 2010 faltered. A subsequent effort in 2012 sold less than 1.5 percent of the shares and raised only about $20 million.
Things haven’t much improved for Caesars. Last year, net revenue tumbled 4 percent, swinging the company to an operating loss. And $2.1 billion of interest payments on $24 billion of debt exceeded the company’s adjusted Earnings before interest, taxes, depreciation and amortization. Investment must be constrained. Moody’s last month cut the corporate family credit rating to Caa2, narrowly above default.
Hence the convoluted experiment laid out on Tuesday. Caesars is creating Caesars Growth Partners and giving its shareholders the right to buy a piece of the new vehicle through a holding company. Apollo and TPG are kicking in $250 million apiece. Caesars is contributing its Internet operations, handing off about $1.1 billion in debt, and selling the new unit a stake in a casino being developed in Baltimore and the Planet Hollywood in Sin City. Caesars will retain a big economic interest in Growth Partners. In three years, it will have the option to buy back voting control and, after five years, it can liquidate the business.
For all the intricacies, the plan hardly makes Caesars any more the master of its fate. It’s also a precarious time to value the online division given the uncertainty surrounding U.S. Internet gambling law. Investors nevertheless sent Caesars shares up by more than a quarter on Tuesday. With the $2 billion company still mostly owned by the two buyout firms and their co-investors, who originally put in $6 billion in equity, the few public shareholders may have been blinded by science.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
