Should You Buy This Gaming IPO?

Caesars Entertainment (NASDAQ: CZR  ) has finally spun off its growth assets in the form of Caesars Acquisition  (NASDAQ: CACQ  ) , which hit the public market this morning at about $12 per share.  

The spinoff will allow Caesars Entertainment to pay off some debt and give investors a great way to play the potential growth of online gaming. Here's what you need to know.

What is Caesars Acquisition?
The offering and corporate structure between Caesars Entertainment and Caesars Acquisition Company (CAC) is complicated, but I'll lay it out as simply as I can. What you need to know is that CAC and Caesars Entertainment are really building assets in Caesars Growth Partners, which will be 42.4% owned by CAC and 57.6% owned by Caesars Entertainment. For its stake, Caesars Entertainment contributed Caesars Interactive Entertainment and $1.1 billion in senior notes.

Caesars Acquisition Company's new logo. Source: Caesars Acquisition.

The main operating assets Growth Partners owns are Planet Hollywood in Las Vegas and the World Series of Poker. Last year, these assets generated $511.4 million in revenue, $145.3 million in EBITDA, and net income of $127.4 million, according to documents filed with the SEC. Remember that CAC only owns 42.4% of Growth Partners, so these figures will be highly diluted for CAC shareholders. For CAC, total proceeds of today's offering of 135.8 million shares were $1,173.1 million. $360 million of that will be used to purchase Planet Hollywood and a 52% ownership in Horseshoe Baltimore from Caesars Entertainment. $514.6 million in debt related to Planet Hollywood comes with the deal.

Also, keep in mind that at a $12 share price, CAC has a market cap of $1.6 billion. The $54.0 million in net income attributable to CAC puts the P/E ratio at 30, which may not be too bad considering the potential for the company.

Why own Caesars Acquisition?
The most valuable asset the company owns is Caesars' potential online gaming operations, which is really the only reason I may be interested in the stock. The potential for online gaming is tremendous and the World Series of Poker brand is the best in the business.

It's conceivable that if regulated on a federal level, the online gaming industry could generate in excess of $3 billion in revenue, of which the World Series of Poker would be a major player. That's where the true upside lies, although we've been waiting for the potential of online gaming for years, so this may not be a bet that will pay off any time soon.

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Read/Post Comments (4) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On November 19, 2013, at 3:23 PM, bpostma wrote:

    Hey fools:

    Check the prospectus, CZR has a right to call shares back for $14.92 ($8.64 x 1.2 x 1.2 x 1.2) each in three years, so upside from 12 is pretty small. PE 30 is pretty rich when your max upside is $2.92 or 8.1% per year.

    Most CZR bonds are paying a bit more.

  • Report this Comment On November 20, 2013, at 12:48 PM, TimoDOZ wrote:

    CZR is drowning in $24 billion in debt and off sheet balance obligations plus leasing obligations.

    The stock recently did a rights offering below $10 against it's then high teens low $20's PPS.

    It's 10% bonds sell near $.60/$ if you can even find a bid.

    This spin off is just the next desperate effort to forestall unserviceable debt burdens.

    A Federal Appeals court in Philly recently upheld a lower Federal court ruling that only 4 states are qualified under existing law to operate Sports betting books. NJ is not one of them.

    This company and the spin off are heading down to where these spinning whirlpools that develop in a toilet go.

    Really this company may after all these dilutions to the shares and debt still be worth $6 a share. So it is probably still worth something. Probably half of that $6?

    The value coming to fruition is reliant on the HOPE that internet gambling and sports betting in places like Atlantic city are going to take this company to the performance metrics of Casino Stocks with exposures to Macau and other prosperous Asian gambling Meccas.

    Hope will be the last to die for the flashy named company.

  • Report this Comment On December 01, 2013, at 12:40 PM, thebobcat wrote:

    Bpostma...

    Can you tell me on what page of the prospectus it says the $14.92 amount (or I guess the 20% growth multiplier)? Thanks.

  • Report this Comment On December 01, 2013, at 12:46 PM, thebobcat wrote:

    I found this on page 99.

    "The purchase price will be the fair market value of the voting units of CGP LLC (or shares of CAC’s Class A common stock) at such time based on an independent appraisal, subject to (i) a minimum purchase price equal to the capital contribution in respect of such units plus a 10.5% per annum return on such capital contribution, or (ii) a maximum purchase price equal to the capital contribution in respect of such units plus a 25% per annum return on such capital contribution, in either case, taking into account prior distributions (other than tax distributions) with respect to such units."

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