Analysis: Stock struggles, debt have analysts concerned about Caesars

Let's put to rest one rumor concerning Caesars Entertainment Corp. that has been floating throughout the poker blogosphere.

The company is not selling the World Series of Poker.

Caesars is saddled with nearly $20 billion in debt, highest in the gaming industry.

The company's stock price has taken a bath, falling more than 60 percent since the initial public offering in February.

One respected bond analyst has said the casino operator might need the help of the U.S. Bankruptcy Court to restructure its obligations.

But the World Series of Poker is not on the auction block.

In fact, if the U.S. ever gets around to legalizing Internet poker, the brand might become the most lucrative product in the Caesars portfolio.

The rest of the company?

That's where the concern lies.

Caesars Entertainment is the largest casino operator in the world, with 55 casinos in 13 states and six countries. In Nevada, Caesars has 15 properties, including 10 on or near the Strip, such as Caesars Palace, Rio, Harrah's, Bally's and Planet Hollywood Resort. Caesars is also building the $550 million Project Linq between the company's Flamingo and Imperial Palace hotel-casinos.

But, after two straight quarterly losses totaling more than $522 million in the first half of 2012, the investment community is understandably jittery.

Over the past 24 months, the company has worked to extend due dates of its corporate bonds by several years. The earliest will mature in 2015. The extensions, however, come with higher interest costs.

Caesars isn't making enough money to cover the payments and there is a growing concern the casino operator is on shaky ground.

OUTLOOK DOWNGRADED

Fitch Ratings Service on Sept. 5 lowered its outlook on Caesars Entertainment from a "stable" rating to "negative." Analysts wrote the company "is burning through cash" at a rate where it may bump up against debt covenants.

The maximum multiple Caesars' debt can reach in comparison to cash flow is 4.75 times. In recent earnings, the figure has been as high as 4.4 times cash flow.

And it's growing.

Fitch is worried that Caesars' revenues - more than $4.4 billion in the first six months of the year - won't cover costs, especially if debt interest has increased.

"Fitch lowered its base case projections following weak second-quarter results and the continuing third-quarter trend of disappointing revenues being reported by states in which Caesars operates," Fitch gaming analyst Michael Paladino wrote.

"Fitch maintains a circumspect view regarding the prospects for a stronger-than-expected improvement in Caesars operating results over the next couple of years," Paladino said.

A Chapter 11 bankruptcy reorganization, which would allow Caesars to restructure the debt, was one option Fitch put on the table.

Those close to the company, however, said Caesars Entertainment Chairman Gary Loveman would find other measures before placing the company in bankruptcy. That would be the last possible move.

IMAGINING A SPINOFF

One course could involve spinning off subsidiary Caesars Interactive Entertainment into its own separate, publicly traded company.

Caesars Interactive operates the lucrative World Series of Poker. The brand, now in its 43rd year, has grown into a year-round poker extravaganza. Beyond the annual Las Vegas showcase at the Rio, the World Series of Poker has 20 Circuit events throughout the U.S. and Canada, the World Series of Poker Europe, and the World Series of Poker Asia-Pacific starting next April.

Also, Caesars Interactive controls the company's legal online gaming operations in Europe and the social gaming website Playtika.

In the second quarter, Caesars said revenues from the interactive division helped offset losses incurred from the Strip and the company's four Atlantic City resorts.

Sources confirmed Caesars officials were proceeding with the interactive division's IPO earlier this year. However, company executives were spooked after shares of social gaming giant Zynga fell more than 83 percent since they began trading Dec. 16.

How valuable is Caesars Interactive?

Rock Gaming, Caesars' partner in two Ohio casinos and planned casino in Baltimore, bought 12,300 shares - an undisclosed percentage - of the business in April for $60.8 million.

Rock Gaming has an option to buy another 3,140 shares for $19.2 million next month.

Fitch said a spinoff of Caesars Interactive would immediately signal a potential restructuring.

Caesars officials declined to comment on the Fitch report.

STILL GROWING

Contradicting the rating service's view is the company's efforts to expand and grow its presence in emerging gaming jurisdictions. But to save on draining resources, the company is taking on partners and giving up equity.

In May, Caesars and Rock Gaming opened the $350 million Horseshoe Cleveland. The companies also own the
$400 million Horseshoe Cincinnati, which opens next spring.

The proposed $300 million Harrah's Baltimore could open in 2014. Caesars and the Suffolk Downs Racetrack are the leading bidders for a proposed $1 billion hotel-casino complex in Boston.

In the meantime, Caesars is shedding older holdings. In an interview at the Horseshoe Cleveland opening, Loveman said Caesars would explore the sale of casinos "in crowded markets" to finance new properties.

A week earlier, the company agreed to sell Harrah's St. Louis for $610 million to regional casino rival Penn National Gaming. Analysts expect the proceeds will help pay down debt, but the transaction won't buy Caesars much time.

To use a current economic comparison, the deal is like an underwater homeowner who owes the bank more than twice what his house is now worth. Selling a piece of furniture won't help pay off the monthly mortgage.

Caesars could still be a seller. There may be interest in the company's two casinos in Iowa and its four properties in Mississippi.

It is also hoping to unload its ill-fated Caesars Macau, a 175-acre golf course on Macau's Cotai Strip region the company bought for $577.7 million in September 2007 with plans to build a hotel-casino destination.

PINNING HOPES ON LINQ

One venture considered safe is Project Linq on the Strip. The retail, dining and entertainment district anchored by a 550-foot-tall observation wheel is under construction, fully funded and scheduled to open next year.

Caesars, which was known as Harrah's Entertainment until the end of 2010, is the end result of several high-profile, multibillion-dollar gaming industry mergers in the past decade.

However, the company's $29 billion buyout in January 2008 by private equity firms Apollo Management Group and TPG made some wonder whether the deal had left the casino operator with too much debt.

Loveman said in May that the company's size and 45 million-member Total Rewards customer loyalty program would help it weather the economic storms.

"We have a dominant American operation," Loveman said, "We are so much bigger than anyone in the United States."

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.
Follow @howardstutz on Twitter.