Yesterday, we presented a factual overview of CET, its various subsidiaries, and the current lay of the land re the whole bankruptcy filing. As to the Fortune feature referenced in the original question that we received, its primary source is Gary Loveman, so there’s a certain cover-your-ass quality to its recollection of a high-risk leveraged buyout that went spectacularly bust. We cannot disagree with Fortune’s present-day assessment of Caesars as "now a mess—a holding company standing on top of a shifting mix of casino and real estate assets that together lost about $2.8 billion last year, a slight improvement from the year before." The company was taken private for $31 billion in 2008. In order to make that number work, the economy simply had to keep improving. However, as Las Vegas went, so did the nation and 2008 was marked first by stagnation, then outright recession. In debt beyond imagination, Caesars was caught with its proverbial pants down.
To get the LBO money, Loveman went to two private-equity firms, Apollo Management and Texas Pacific Group. "They were too smart by half, and they just pushed the edge of the envelope too much, and they’re getting called on it," a banker told Fortune. As for Loveman, his job quickly became one of restructuring debt and postponing maturities, all to buy Caesars relief … until Jan. 15 of this year, when the inevitable bankruptcy filing occurred. At the hand-over-fist rate at which Caesars was losing money, it was a race between preservation and catastrophe.
Loveman also tried to spend his way out of the hole he’d dug himself, opening new casinos as fast as the opportunity presented itself – within reason. A multi-billion metaresort on the Strip (shades of MGM’s CityCenter) was shelved in favor of remakes of Bill’s Gambling Hall and Imperial Palace into The Cromwell and The LINQ, respectively. Loveman’s pet project was the Vegas High Roller, a Ferris wheel that has so far failed to perform up to expectations. (Being hidden behind The LINQ and Flamingo Las Vegas doesn’t help.)
A Harvard University data-marketing wonk, Loveman, was a success as Caesars’ chief operating officer, developing Total Rewards into the customer-loyalty turbine that it is today. ("I wasn’t surprised that it worked, but I was surprised at how well it worked," says Loveman.) As a CEO, he seemed often to lose his way, substituting spending for strategy. The successive rolling up of Horseshoe casinos, the World Series of Poker, Imperial Palace and Park Place Entertainment racked up an $11 billion. Then he decided to take then-Harrah’s Entertainment private, nearly tripling a mountain of debt.
As Fortune puts it, "They had unwittingly piled on billions in debt at Caesars at the very moment the economy was about to go into free fall — taking the company’s cash flow down with it." Caesars was also experiencing an oversupply crisis. For instance, it held onto four casinos in Atlantic City even as Pennsylvania was revving up as a competitive market. To add insult to injury, one of Atlantic City’s prime competitors was its own Harrah’s Chester, near Philadelphia.
Another problem was that Caesars had taken itself private for 10 times cash flow, a high premium in the casino industry -- although Loveman & Co. still refuse to concede that they overpaid – and when the Great Recession struck, the leverage effectively went to 14 times cash flow. What happened next, per Fortune, were "more than 50 mind-numbingly complex transactions … Newly affiliated companies were created, and assets shifted among them." An initial public offering of a small percentage of Caesars stock only raised $16 million. (Later IPOs fared better.)
Asset sales were discussed but the only significant transaction was to unload Harrah’s Maryland Heights, in St. Louis, to Penn National Gaming. But, you guessed it, the proceeds were rolled into building more casinos elsewhere, not retiring debt. Regular rumors surfaced that the Rio was on the block for a half-billion dollars, but either the asking price, the property’s off-Strip location, or its dilapidated condition meant no deal was struck. Meanwhile, various Caesars subsidiaries were selling parts of the company to each other. In the most controversial of these transactions, Total Rewards changed hands for the princely sum of zero dollars. (Creditors value it at $1 billion.)
All this ledgerdemain enabled Caesars to move cash – as much as $1.8 billion in one instance – from solvent units to insolvent ones. Caesars reneged on its guarantees to junior debtholders, sparking investor rage … and lawsuits. Senior creditors would get as much as 87 cents on the dollar while junior ones would have to settle for nickels. Noting the low-priced asset transfers within Caesars, one lawsuit memorably proclaimed, "This is a case of unimaginably brazen corporate looting and abuse perpetrated by irreparably conflicted management."
Caesars tipped its hand to the bankruptcy a month ahead of time, when it welshed on an interest payment on its debt (a burden so massive that just servicing the debt was eating Caesars’ resources alive). To many this simply was the inevitable outcome of Loveman’s lack of financial prudence, Caesars’ reckless monetary policies, and Wall Street’s propensity for risky, high-stakes corporate wagers.
Apollo and Texas Pacific stand to recoup at least 20% of their Caesars investment, perhaps more. As for Loveman, although he continues at Caesars Entertainment as chairman of the board and keeper of its institutional memory, he leaves the CEO’s chair under a cloud. The bankruptcy procees could take a year and a court-appointed investigator is probing whether the intramural asset transfers were for fair value. If they’re found to be a "fraudulent conveyance," Loveman’s sleight of hand will be reversed, potentially enabling junior creditors to get a bigger piece of the pie. There aren’t any winners in the Caesars bankruptcy, just survivors.
