Liquidity is important in the casino industry because it offers the ability to make large investment decisions quickly. For example, when the Japanese government legalizes large-scale casinos and a new market suddenly opens up, liquidity can determine whether or not your company can get in on a high-growth region. Caesars Entertainment (CZR) has the highest debt in the industry with no major growth properties to show for it, which is concerning. This is not just a concern for the company and its investors, it is a concern for the governments of potential new markets as well.
Ignoring debt costs Caesars an opportunity
In 2012, Caesars submitted a bid to enter the South Korean market after the government decided to finally allow casinos to build large-scale casinos in the country. Throughout the first half of 2013, most analysts expected the bid to be a sure win. Unfortunately for Caesars, in June 2013 the South Korean government declined the bid. Analysts close to the matter agreed that the likely reason was the company's huge debt load.
A few months after the denied bid, the company announced that it would sell its Macau property (which was not operating gaming anyway) to pay down long-term debt. With a denied bid in South Korea and then the sale of its only property in Macau, the company now has no major Asian holdings. Chairman Gary Loveman has said that not entering Macau was the worst mistake the casino ever made.
Could Japan rectify the "worst mistake the company ever made?"
That next big Asian gaming market is likely to be Japan, which analysts expect will beat out Singapore to become the second-largest gambling hub in the world behind Macau. The only obstacle: casinos are still forbidden in the country. The government will vote on legislation in the coming months that will decide whether or not casinos will be allowed to begin building in Japan, but it is expected that they will vote to allow casinos. In fact, casinos companies are already talking with officials in Osaka as they prepare plans for their bids.
Caesars met with Osaka officials late last year to discuss plans for investment in Japan, if allowed. The company has even been in talks with local potential partners such as gaming machine makers Konami and Sega Sammy Holdings in anticipation of changes in the Japanese casino ban.
However, Caesars faces tough competition in Japan. Las Vegas Sands (LVS 3.44%), which collects 86% of revenue from its Asian operations, has already said that it would happily agree to invest as much as $10 billion to win a bid in Japan. Other casino companies are also preparing to fight for spots in the market.
MGM Resorts International (MGM 2.52%), Wynn Resorts (WYNN 2.67%), and Melco Crown (MLCO 2.83%) have all said that if allowed, they will happily invest the estimated sum needed to build a casino resort in the area. Wynn reaped $1,119.9 million from its Macau operations in the fourth quarter of 2013, 74% of the company's total revenue for the quarter. Likewise, MGM Resorts noted in its third-quarter 2013 earnings release that it received $808.4 million from its China operations, 34% of the quarter's total revenue. If Macau is an example of what Asian profits can do for a company, casinos will fiercely fight for bids in Japan.
Or is the debt restructuring too little too late for Caesars?
The company is now working with Lazard Ltd, an investment bank, on financial restructuring. Last week the company announced that it would distribute $2.2 billion to its entity Caesars Acquisition Company in a restructuring attempt. The parent company had $27 billion of debt when the Korean government decided that the company was not in a financial position to operate in the country. Currently, the company has a total debt load of around $21.5 billion, which shows definite improvement. Now the company needs to prove that it can continue to push this number lower.
That may be hard without higher earnings. The company posted net losses in 2012, and it has done so for the cumulative first three quarters of 2013. While the company has reported an estimated slight increase over the same period last year, it is not likely that the company will report a net gain for 2013 when it releases earnings for the year next week. Regardless, the company continues to be optimistic as it does not think it is in dangerous territory. Last November, Loveman said, "The conditions the company faces today are better and not worse than they have been before," and that "We're much better structured. There is nothing that would trigger a liquidity crisis." He promised that a bankruptcy reorganization "was not an option" for the company, noting that no significant debt maturities until 2018.
Wait on more bullish news from Japan
The Japanese gaming market seems poised for big profits, assuming that legislation that allows casinos into the market passes. However, Caesars will still have to prove to the Japanese government what the company couldn't prove to the South Korean government, specifically that the company is in a financial and competitive position to bring revenue to the country without carrying too much risk. Without higher earnings, the government may not be persuaded that reshuffling debt down to subsidiaries is enough for Caesars. Investors should wait to see if any new events that bring about higher earnings, such as a casino in Japan, come about that will help the company pay down debt before making a bid.