The Caesars squeeze

While the emperor (CEO Gary Loveman) may have escaped the Ides of March this year, knots of discontented tribunes are gathering on the Forum steps, muttering darkly.  A cabal of hedge funds led by Silver Point Capital is looking at $4.6 billion that comes due a couple of years hence and wants to start talking now about alternative methods of repayment. The funds’ money is secured by an unspecified number of Caesars Entertainment casinos, so you can see where this is going. However, they’ve not been able to get the ear of majority owners Texas Pacific Group and Apollo Management. The latter are expected to continue blowing off the dissident funds, at least according to one Wall Street Journal source.

Another problem for Silver Point and its allies is that Caesars carries its casinos at a value (nearly $16 billion) that would difficult (read: impossible) to recover on the open market. The company’s present expansion strategy is reminiscent of the death throes of the Bernie Goldstein regime at Isle of Capri Casinos, when the company increased cash flow by dint of opening casino after casino, not by growing same-store revenue.

Loveman may have two footholds in Cleveland and a third in Cincinnati. However, I am hard-pressed to agree with Deutsche Bank‘s Carlo Santarelli that these are “low-risk, high-reward” propositions. Caesars bears a small portion of the cost … and gets a correspondingly slice of the revenue (20%). Where would any of those be without sugar daddy Dan Gilbert? If Suffolk Downs happens — and Caesars does have well-placed political allies — it’s years away and will be another minority-investor proposition. So if Caesars makes a couple of hundred million here and there, it’s vanishing into a $21.3 billion chasm.

Much hope is placed on the spinoff of Caesars Interactive and on going live with the World Series of Poker brand online. The latter will surely crush Station Casinos‘ Ultimate Poker, which was rushed onto the market in a bare-bones form whose salient feature appears to be its ability to inspire customer complaints. PokerStars claims Caesars was sufficiently desperate to attempt to sell the WSOP brand (along with the unloved Rio hotel-casino), but the contention stretches credulity, even for a firm as strapped as Caesars.

Even so, Seeking Alpha last week advised shorting CZR shares, calling it “a fragile stock — it is grossly overvalued, has a terrible balance sheet and deteriorating free cash flow … one of the worst balance sheets I have ever seen. In fact, it seems as if the only thing this company is good at is taking on more debt,” with no margin of safety should the economy go south again.

Also, over $3 billion in additional debt is being carried off the books. Whatever cash the company takes in on its “Caesars Growth Properties” IPO may go right back out again in negative cash flow — $775 million just in the last four quarters, part of an accelerating downward spiral. The numbers just worse from there … so don’t be surprised that Silver Point et. al. are trying to secure a chunk of the company while there’s still something tangible to be had.