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.
While CZR is reducing debt, it’s also shrinking its pool of assets — and more importantly, their earnings potential.
The company can attempt to cherry-pick its way out of this jackpot, but the simple truth is bankruptcy is likely its best solution.
To illustrate what I’m talking about, I’ve calculated the Altman Z-Score — a quantitative measure of a company’s financial health — for CZR stock, JCPenney (JCP) and Sears Holdings (SHLD). Recently, I’ve discussed the dicey situation that both retailers face as they attempt to revitalize their businesses. Sears’ ultimate success appears to rely on its real estate whereas JCPenney CEO Mike Ullman looks to turn around its business by sticking to its knitting. Although they are following different paths, it’s possible both sets of shareholders could find salvation.
So, here are their Z-Scores, and what they mean:
- Sears Holdings: 2.06
- JCPenney: 0.91
- Caesars Entertainment: 0.53
According to this metric, any company with a score of 1.8 or less faces imminent financial collapse. Those between 1.8 and 2.7 could face bankruptcy within the next 12 to 24 months. Point being, all three are living on borrowed time.
It’s important to note how low the Z-Score is for CZR stock. At least JCPenney can do things to ramp up its cash flow. Caesars Entertainment will end up paying $2.3 billion in interest in 2013, or six times what JCPenney doled out managing its debt. That’s just nuts.
The assets CZR has sold to Caesars Growth Partners are controlled by TPG and Apollo, not the company itself. Although Caesars Entertainment owns a 58% economic interest in CGP through Caesars Acquisition Company, the voting shares in CACQ are held entirely by TPG and Apollo. Those assets are never coming back.
While it’s possible CZR stock will keep going higher, the bankruptcy risk associated with its business is just too darn high for the average investor.
So, is it time to turn off the lights at Caesars Entertainment?
It’s close … but anything can happen when it comes to debt refinancing. My advice to anyone considering an investment in CZR stock — unless you’re John Paulson or some other billionaire — is to put your egg in another basket. This one could go splat at any moment.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.