Caesars is for sale: Let the buyer beware By Ken Adams, CDC Gaming Reports March 30, 2019 at 8:00 pm Oh, once mighty Caesar, what has befallen thee? Caesars Entertainment, once the strongest of casino companies appears to be nearing its end. Since December Carl Icahn has acquired nearly 20 percent of the stock of Caesars Entertainment. Icahn thinks the company is underperforming and the stock undervalued. To rectify the situation, Icahn wants Caesars to make some structural changes including a new CEO and new board members. But even after that is done, Carl will not be content; he wants the company to put itself up for sale. Icahn has a long history of buying and selling corporations and casinos and he has rarely failed to achieve his objectives and make a profit in the process. If Icahn succeeds this time Caesars will probably have a new name. The leading candidates are Eldorado Resorts and Landry’s, which operates the Golden Nugget casinos. It would not be the first time that Caesars has changed its name. since Bill Harrah died in 1978 the company he founded has been called Harrah’s, Holiday Inns, Promus, Harrah’s Entertainment and Caesars Entertainment. It would be ironic if the winning bidder turned out to be Eldorado Resorts. Both Harrah’s and Eldorado began in the same town, on the same street, just two blocks from each other, although their beginnings were separated by 40 years. Since their Virginia Street days. both companies have expanded and changed dramatically; Eldorado now operates twenty-six casinos in the United States and Harrah’s/Caesars has fifty. Over a 40-year period, Harrah’s acquired Holiday Inn casinos, Harveys, Showboat, Rio, Horseshoe, Bourbon Street, Imperial Palace, Barbary Coast, Planet Hollywood Las Vegas, Grand Casino Gulfport, Louisiana Downs and Caesars. Harrah’s also operates two Indian casinos, one in North Carolina and one in Arizona, with another soon to open in California. Along with the casinos, Harrah’s was buying a database which eventually reached 35 million known customers and the famous World Series of Poker. The database became the foundation of its Total Rewards program that links its properties together. A player from Nevada can go to Mississippi, Illinois or Atlantic City and use his/her player points. Total Rewards gave Harrah’s the ability to use the database to drive revenue in a way no other casino company could match. The World Series of Poker is equally important as a marketing tool. The tournament takes place in Las Vegas and the final round is televised nationally. That begs the question, how could a company with those assets ever come to be in the position Caesars finds itself today? It wasn’t easy and did not happen overnight. In 2006 things were going well for Harrah’s, but the CEO thought the stock was undervalued by the market. Harrah’s started to explore ways to strengthen its stock price. In that process it explored REITs and a private buyout. The buyout appeared to be the best idea to management and the board of directors. It would give the stockholders a good price for their stock and thereby fulfill the fiduciary duty of the board and management. It might have been a good idea in 2006, but by 2008 when the regulatory approvals had been granted and the financing arranged, conditions had changed radically. It was the beginning of the Great Recession. The final sale price was $17.1 billion, and the new company assumed $10.7 billion of debt, leaving the operating company with $25.1 billion in debt to start 2008. Not good timing. During the recession casino revenues dropped and the company struggled to make its debt payments. Seven years after the finalization of the buyout, Caesars/Harrah’s declared bankruptcy. The corporation emerged from bankruptcy 34 months later as two entities – Vici Properties and Caesars Entertainment. Vici is a real estate investment corporation that owns 22 casinos. Caesars owns and operates the other casinos and is the operator for the 22 casinos Vici owns. Caesars/Harrah’s today bears no resemblance to the one founded by Bill Harrah in 1937. But of course, nothing is the same today as it was 80 years, no industry, company or product. Caesars’ problems today are not because it changed, but because it did not change enough. Saddled with a $25 billion debt and then a bankruptcy, Caesars virtually sat still for ten years. The rest of the industry did not. Other casino companies were building new and more exciting properties and refurbishing older ones, while Caesars struggled just to stay afloat. It closed several properties in the most challenged markets and badly neglected others in markets that less profitable. The result is a company that probably needs just what Carl Icahn is recommending – a buyer with cash and a new vision. Purchasing Caesars will not be a simple transaction. The regulatory hurdles will be difficult to overcome. The two contenders are experienced operators and probably have access to the necessary financing. But they have properties in the same jurisdictions that Caesars has casinos. To get approval from gaming regulators it will probably be necessary to sell some properties to another operator. The cost will also create challenges; Caesars will be expensive. A high price has the same danger attached to it that the private buyout of Harrah’s had, excessive debt. Any downturn in business could push a highly leveraged company into bankruptcy. REITs are a way to lessen the debt and they are becoming major players in gaming transactions. It is likely that any buyer would partner with a REIT. But even with a REIT buying Caesars could still be a risky proposition as the deal will still require considerable debt to finance it. The operating company will need to service its own debt and make the rent payments to the REIT. Even a structure that includes a REIT will be very vulnerable to economic changes, recessions and wars. Any buyer will face the risk of economic downturn. To service its debt, the buyer will need the economy and gaming revenue to be stable or improve. It that does not happen, bankruptcy court is just a step away. Let the buyer beware.