Caesars Entertainment (CZR) is divesting more assets in a race to survive. The company announced Monday that it was selling four casinos to Caesars Growth Partners, the company it spun off last November to hold its interactive entertainment assets and a couple of casino properties.
All of these moves are meant to keep Caesars’ 52 casinos it either owns or manages from crumbling under a tremendous amount of debt.
It’s difficult to know whether all this maneuvering will result in anything meaningful beyond huge legal fees. Last September before the spinoff occurred, I recommended investors avoid CZR stock and the newly created Caesars Acquisition Company (CACQ) because the entire situation was a proverbial house of cards.
Is it time to turn out the lights at Caesars Entertainment? I think so. Here’s why:
Debt Slowly Killing Caesars Entertainment
Live within your means — that’s what all the financial self-help gurus recommend when it comes to personal financial planning. Well, the same rules apply to corporations.
However, apparently Caesars Entertainment and its private equity owners, TPG Capital and Apollo Global Management (APO), don’t read those kinds of books. They’re too busy shuffling paper.
Here’s the thing: Caesars Entertainment reports earnings after the close on March 11, and CZR expects to lose up to $1.82 billion in Q4 on $2.11 billion in revenue. No one in their right mind would invest in this kind of situation, but obviously John Paulson (second-largest shareholder behind TPG and Apollo) sees something in Caesars’ business. Perhaps he believes the debt situation will resolve itself without Caesars having to enter bankruptcy protection. After all, on Monday, CZR said its adjusted EBITDA in the fourth quarter could be as high as $415 million, on par with its results in Q4 2012. Things are improving, says CEO Gary Loveman.
And besides, most of the quarter’s loss is a result of $1.9 billion in asset impairments. Toss those aside, and it’s all good, right?
This recent deal provides Caesars Entertainment with $1.8 billion in cash. With these additional proceeds, its liquidity jumps from $1.8 billion (as of the end of September) to $3.6 billion. Caesars’ total debt including this transaction is approximately $21 billion.
Moody’s (MCO) has put CZR stock on review, noting:
“The sale will provide CEOC with needed liquidity to fund operating losses, however, the loss of EBITDA, from four properties, including three located in the better performing Las Vegas market, is negative for CEOC’s overall credit profile.”
Even if Caesars Entertainment pays down $2 billion of its total debt, it will still have a level of debt 11 times adjusted EBITDA (approximately $1.9 billion in fiscal 2013). Neither Las Vegas Sands (LVS) or Wynn Resorts (WYNN) carry nearly as much debt, and their businesses are much stronger.
Asset Sales Won’t Rescue CZR
Every time Caesars Entertainment sells a casino, it loses EBITDA. Granted, this divestiture is to an affiliate, but the results are the same.