As Caesars Entertainment (CZR) careens ever closer to bankruptcy, it made an interesting move yesterday to acquire its publicly traded subsidiary Caesars Acquisition (NASDAQ: CACQ) in an all-stock deal. The deal comes as Caesars' largest unit negotiates with debt holders on a bankruptcy package that could come early in 2015.

Why buy Caesars Acquisition now if bankruptcy is looming? It might be to retain value for all stakeholders over the long term.

Caesars Entertainment owns some of the most valuable land in Las Vegas. Image source: Eric Salard via Wikimedia. 

Why Caesars is back under one umbrella
To understand why it makes sense for Caesars Entertainment to buy Caesars Acquisition, we have to consider the reasoning for the spinoff just over a year ago.

Caesars' private equity owners TPG and Apollo knew the $23 billion debt load hanging over the company would to lead to bankruptcy before long, and they wanted to capture as much value as the could before than happened. They tried to do this by spinning off Caesars' "good" assets into a publicly traded company that had a reasonable amount of debt. In theory, the "bad" company could then go bankrupt and they would still salvage some value from their equity position in Caesars Acquisition.

Caesars Acquisition's time on public markets was short. Image source: Caesars Acquisition.

Not surprisingly, bondholders didn't like this idea, and at least four lawsuits were filed claiming the spinoff was illegal because the "good" assets were collateral for their debt if the company went bankrupt. You can't just shift assets to a new entity and leave debt holders with nothing.

In essence, this is like buying a home with a mortgage from a bank, moving the home to a different lot, and then defaulting on your mortgage. The bank would argue that the relocated house is still an asset it should be able to repossess because it was part of the mortgage agreement.

Debt holders win
It appears Caesars eventually agreed to avoid a long and costly legal battle (which would have likely hurt business, too) and just combined back into one company. With management closing in on a potential deal for a prepackaged bankruptcy, it did not want the Caesars Acquisition assets being another hurdle to overcome in bankruptcy court. 

Now, bankruptcy can proceed in a more normal process and assets can be split up between stakeholders.

The biggest unknown for Caesars
Caesars' stock was up recently, and the combined company has a market cap of nearly $4 billion. This is before bankruptcy, which often wipes out equity holders altogether.

We don't know what Caesars corporate structure or current shareholder value might be after bankruptcy, but stockholders are not the ones with leverage if the company goes bankrupt. Debt holders hold the cards, which is why Caesars' management is engaging them already.

Whatever agreements Caesars says it has with debt holders, only a small percentage of them have agreed to any restructuring. So, even bankruptcy won't be a slam dunk given the $23 billion debt load.

I'd stay far away from Caesars Entertainment shares, whether they merge with Caesars Acquisition or not. This company is likely headed for bankruptcy, and betting on getting any value out of that is a roll of the dice and you're betting on snake-eyes -- so good luck.