Question of the Day - 18 April 2020

[Editor's Note: This analysis was penned by LVA's Stiffs & Georges blogger David McKee.]

Not exactly. However, the coronavirus was the catalyst that put the ailing Cirque du Soleil patient into intensive care.

Cirque finally has more financial balls in the air than it can juggle. The root of the problem dates back to a 2015 and the $1.5 billion leveraged buyout of Cirque that lumbered the troupe with as much as $900 million in debt, on which it's now defaulting. Architect of this fiasco is TPG Group, one of the two private-equity funds that bankrupted Caesars Entertainment with a $29 billion leveraged buyout in 2008. 

The specter of Chapter 11 for Cirque was the downgrade of its bonds to second-from-worst status by Moody’s Investor Service. It reported, “The rating action reflects Moody's view of a high risk of default and follows the announcement of the temporary suspension of all Cirque du Soleil touring and Las Vegas residential shows due to the coronavirus outbreak. Revenue loss in 2020 will drive a steep decline in [cash flow] generation with limited prospects for a tenable capital structure thereafter. Weak liquidity, soft show demand and challenging economic conditions will further pressure Cirque du Soleil's operating flexibility and capacity for growth capital investments once shows resume.” 

The crisis comes at a time when Cirque is badly overextended, with 15 resident shows (six in Las Vegas) and 18 touring. Its Siamese-twin relationship with MGM Resorts International turns out to be a bigger risk for Cirque than for MGM, as those resident shows account for 35% of Cirque’s revenue. Also, most of those spectacles are getting pretty long in the tooth: nearly 30 years for Mystere (Cirque's only Vegas show not at a MRI property) and more than 20 for O. 

Nor does Cirque have much money in the till. As of Moody’s review, it had $20 million in cash, plus another $85 million in letters of credit. 

Revenue for Cirque is $950 million, but after operating costs (33 shows, remember) and debt servicing, there’s precious little left over. That cost of capital is high, too. Leveraged loans, after all, have higher interest rates that reflect the higher risk of default.

Adds Moody’s, “The entertainment sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Cirque du Soleil's credit profile, including its exposure to Las Vegas, as well as locations globally, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread.”

CEO Daniel Lamarre has already taken austerity measures that could presage ongoing cost cuts, including laying off 95% of Cirque’s workforce … 4,679 people, to be precise. 

Cirque also seems to be losing its cachet with audiences. While its Vegas shows play to 70% of capacity, three of the last four (Viva Elvis, Zarkana, and R.U.N.) have been flops. Only Michael Jackson ONE broke the unlucky streak.

The troupe's non-Vegas ventures have gone even worse. Cirque reportedly lost $30 million in China and $20 million on something called “the NFL Experience” in Times Square.

All that paled next to the $70 million bath it took on R.U.N., the Luxor extravaganza that opened in late October 2019 and closed on March 8, a week before the shutdown. It was the shortest-lived Cirque du Soleil production in its 27 years in Las Vegas.

“It was telling that they just pulled the plug on R.U.N., instead of trying to fix it like they did the Elvis show,” writes Cult Vegas author and former long-time Las Vegas entertainment columnist Mike Weatherford.

Scrapping the touring shows, perhaps along with the underperformers in Vegas, though drastic, might free up enough room on the balance sheet to keep Cirque afloat. But a source close to Cirque says, “The Vegas shows, as far as we know, will reopen in time. Opening the shows will take time once it’s deemed safe. We have not heard any dates.”

Chapter 11 status would enable it to limp forward on a permanent basis, possibly without draconian measures. 

In that scenario, Weatherford says, “You could assume the Vegas shows are the safest — they have paid for themselves many times over. The value of the shows is in keeping them open. It's not like the hydraulics of the O theater would be assets in themselves.”

But a return to Cirque’s former status as the 800-pound gorilla of the Las Vegas Strip appears unlikely.