It appears that Caesars Entertainment Corp (CZR) is finally heading toward bankruptcy, an ending that has seemed imminent since the company's IPO in 2012. A judge ruled yesterday that lawsuits challenging the formation of Caesars Entertainment Operating Company (CEOC) and Caesars Growth Partners could move forward while the CEOC subsidiary is in bankruptcy protection.
In essence, this means that Caesars won't be able to protect assets in Caesars Growth Partners from debt holders in CEOC, who argue that they have a claim to those assets. That should pull the entire company into bankruptcy proceedings, where shareholders will likely lose everything and debt holders will restructure or split up the company.
Good Caesars gone bad
In 2013, Caesars Entertainment and its private equity owners started to position the company for a potential bankruptcy filing, setting up the battle we see today. Caesars Acquisition Company was created to own the "good assets" Caesars had, like online poker, Planet Hollywood, The Cromwell, and some other assets. A lot of "bad assets," most importantly debt, were left behind at CEOC. Below is the best visual of the structure that Caesars gave to investors.
Image: Caesars SEC filings.
When CEOC filed for bankruptcy protection, Caesars Entertainment tried to give debt holders almost nothing, while keeping Caesars Growth Partners assets out of the transaction. Debt holders, including David Tepper's Appaloosa Investment LP hedge fund, sued to bring those good assets back within reach of the "second-lien notes" he owned.
Of course, Caesars fought Tepper and other challenges to its corporate structure, but when CEOC went bankrupt it seemed almost inevitable that Caesars Entertainment as a whole would have to go bankrupt eventually. Today, without protection from lawsuits, it appears that CEOC's bankruptcy will probably pull the entire company down.
How Caesars Entertainment got here
The crux of Caesars Entertainment's problems go all the way back to the buyout of Harrah's Entertainment, which would eventually become Caesars Entertainment, back in 2008. The new private equity owners piled on $25 billion of debt, a weight that would eventually bring down the company all these years later.
Operationally, Caesars made a number of missteps as well. The company was highly exposed to the regional gaming market, where it got over half of its revenue, and an expansion of gaming in the U.S. led to a decline in profits for regional casinos. Caesars also missed out on Asia's gaming expansion, which is where successful competitors Wynn Resorts and Las Vegas Sands generate a vast majority of their profits.
Ironically, profits in Asia have provided Wynn and Las Vegas Sands so much cash that they've reduced their debt loads in recent years and begun paying investors dividends. Caesars has gone in the opposite direction, adding debt and growing losses.
The combination of an immense debt load and deteriorating operations at Caesars has long been a recipe for disaster. Today, it appears that it'll finally lead to a restructuring, which has long been needed. That's just not a good sign for current shareholders.
A bet gone wrong
There's really no reason to be anywhere near Caesars Entertainment's stock today. The courtroom battle over the company is being led by massive hedge funds and private equity funds, and small investors have little to gain from entering that battle. Plus, more likely than not we'll see Caesars Entertainment go into bankruptcy protection in the coming weeks. There's little to prevent that now.
It's been an entertaining ride for Caesars Entertainment, but it appears the end is near. Without a miracle the company will need to be restructured, and that's probably best for everyone involved at this point.
