What to Look for at Caesars Entertainment Corp Beyond the Restructuring

Logo: Caesars Entertainment

With years of income losses, poor debt management, and no international presence to speak of, it's no wonder Caesars Entertainment (CZR) is now in trouble, scrambling to restructure and keep its head above water. In the latest move, subsidiary Caesars Entertainment Operating Company on Thursday voluntarily filed for reorganization under Chapter 11 in a move that includes a plan to reduce debt.

But while CZR's stock has plummeted during its troubles, the parent company itself seems likely to pull through and continue operations. With its iconic brand name and history, better operations this time around could mean that the shell of this current company could become the home of a new, better investment in the future.  

Restructuring Caesars
The main reason Caesars is in such a dire position now is its incredibly high debt load, which, at around $23 billion before the start of this round of restructuring, was by far the highest in the industry.  While other companies such as Las Vegas Sands (LVS -0.36%) and MGM Resorts International (MGM 0.87%) have also taken on debt in the past decade, they have massive international properties and increased earnings as a result. While those companies were making big profits on those international properties, Caesars had multiple international attempts that failed, meaning more and more debt racked up with nothing to show for it. 

Caesars is now taking drastic steps to reduce this debt. As early as March 2014, the company began shuffling debt from the parent company down to subsidiary Caesars Entertainment Operating Co. (CEOC). Following this debt shuffling, it seemed obvious that Caesars would then have CEOC seek bankruptcy protection amid negotiating with its debtholders.The Chapter 11 filing happened Thursday, with Caesars saying the plan had received support from more than 80% of first-lien noteholders. The restructuring aims to "significantly reduce long-term debt and annual interest payments, while providing for significant recoveries for creditors and ensuring no interruption of operations across the company's network of properties," the company noted. Click here to go to the CEOC restructuring web page.

On another front, on Dec. 19 the company had announced that it would merge with its other major affiliate, Caesars Acquisition Co. (NASDAQ: CACQ), to pull the smaller but more profitable affiliate into the parent company. By doing so, the company is getting a necessary injection of cash as well. 

As a result of the bankruptcy filing and merger actions, the new Caesars Entertainment should be able to shed about half of its debt, about $10 billion worth. The final entity will consist of just one streamlined company, Caesars Entertainment, at a market cap of about $3.2 billion, with $1.7 billion of cash. 

Caesars' iconic main property, Caesars Palace on the Las Vegas Strip. Photo: Caesars Entertainment.

Caesars after the restructuring: Worth another bet? 
To believe that the company has a chance of transforming into something investment-worthy following this massive restructure -- major portions of which still need to be worked out in court -- there is one major thing investors should want to see: more and better diversification outside the U.S. 

Caesars tried to gain a presence in Macau. The company did have a property there, but it was unable to get the necessary gaming license for building a casino on that property. In 2013, the company made a big bet on building a resort in South Korea. However, the South Korean government ended up not accepting Caesars' bid to build a casino there, either. Following that failed attempt, the company sold its Macau property.

While Las Vegas Sands and MGM Resorts reaped massive profits in Asia over the past five years, Caesars has been failing. By not having broad diversification outside the U.S., Caesars not only didn't have anything to fall back on during the U.S. recession, but it also didn't have the chance to win big on a high-growth area like Macau. For the new Caesars to be a worthwhile bet, investors should be convinced that the company can, and will, diversify more abroad. 

Yet even if the company comes through this restructuring and changes its ways to show some better operating decisions, it still seems to be a much less worthwhile investment than a company like Las Vegas Sands with a track record of success already. Even a leaner and better organized Caesars still looks like a bet to be wary of and one that smart investors should probably stay away from.