Should You Follow the Big Money Into Caesars Acquisition Company?

Some investors with big money are finding their way to Caesars Acquisition's door, as they likely see value in its major position in the online-gaming market. Should other investors follow their lead?

May 15, 2014 at 10:35AM

Caesars Acquisition (NASDAQ:CACQ) was formed in 2013 to help parent company Caesars Entertainment (NASDAQ:CZR) deal with its crushing debt load by buying some of its non-core properties, thereby enabling its parent company to start whittling down a debt balance that tips the scales at over $20 billion. Caesars Acquisition also ended up with its parent company's online properties, a growth business that has benefited from the legalization of online gaming in Nevada and New Jersey.

While Caesars Acquisition doesn't have much of an operating history, some big-name institutions, like Soros Fund Management and Paulson & Company, have been loading up on shares, likely smelling an undervalued story. So is Caesars Acquisition a worthwhile bet?

What's the value?
Caesars Acquisition is really a bet on online gaming, the source of almost half of the company's total revenues in its latest fiscal year. Caesars Acquisition is aiming to be a dominant player in the space primarily by leveraging its parent company's brand name and loyalty membership base, 44 million at last count, and also by adding popular game content through selective acquisitions.   

Caesars Acquisition's focus on the online segment produced solid financial dividends in fiscal 2013, with a 52.4% increase in segment revenues driven by organic growth and the December 2012 acquisition of Buffalo Studios, maker of the popular Bingo Blitz game. During the period, the company benefited from a double-digit increase in both its average revenue per user, or ARPU, and in its base of monthly unique users. The net result for Caesars Acquisition was strong growth in segment operating income, which helped to fund further product development and an enlargement of its online ecosystem.

We're all in this together
Of course, investors in Caesars Acquisition can't get away from the fact that the company's fortunes are inextricably linked to those of its parent company, given its use of Caesars' brand name. On that score, things aren't looking so hot given Caesars Entertainment's ongoing struggle to produce an increase in its top line, evidenced by flat revenue growth in fiscal 2013 in comparison with the prior-year period. 

While the company generated a marginal revenue increase in its core Las Vegas segment, it was hurt by weakness in its regional casino operations as a consequence of heavy competition from states that increasingly look to gambling as an effective way to shore up their tax bases. In combination with rising costs in the always-competitive Las Vegas market, this added up to poorer operating profitability for Caesars Entertainment during the period, which is not a good trend for a company that is trying to get out from under a multibillion-dollar debt load.

A better way to go
While Caesars Acquisition is an intriguing story, and doubly so given the smart money that is beating a path to its door, investors need to be cognizant of the downside risk of its close association with Caesars Entertainment, a company that is likely to be under significant financial stress for some time to come. As such, investors looking for online gaming gold would probably find better returns from other similarly well-positioned players, like Boyd Gaming (NYSE:BYD).

Boyd Gaming has come a long way from its roots as an owner of off-the-strip Las Vegas properties, as it currently operates a portfolio of more than 20 properties. This includes a major position in Atlantic City though its Borgata property, one of the area's premier resorts. More important, Boyd's solid foothold in Atlantic City has allowed it to ride the growth of online gaming in New Jersey, where it held a roughly 40% market share as of December 2013. The net result for Boyd Gaming has been a multi-year growth trajectory in revenues and adjusted operating profits, as well as a solid financial foundation with which to continue building shareholder value.

The bottom line
Caesars Acquisition is a company worth watching as parent company Caesars Entertainment tries to dig out from under its financial problems, but prudent investors should likely sit this one out. A better bet would be Boyd Gaming, which also has a major presence in online gaming and could benefit from any forced asset sales by its more heavily indebted peers.

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Robert Hanley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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