Caesars Entertainment Sells Macau Land for $438 Million Has Big Plans for Online Gambling

–

Macau / Wikipedia

–

/ By Clive Minchom / 

The Macau Land Sale

Caesars Entertainment, the giant US casino operator which is 70% owned by hedge funds TPG Group and Apollo Global Management, who bought the company in 2008, is selling off a 175 acre landholding in Macau on the mainland of China for US$438 million to an Asian group, Pearl Dynasty Investments Ltd.

Harrah Entertainment, Caesars’ corporate predecessor bought the land for US$578 million in 2007, but was not able to obtain a gambling licence afterwards to build a casino. Plans for the land holding were at that point therefore restricted to development as a golf resort. The lack of a gambling licence ultimately proved fatal to Caesar’s plans, though, as the future profit potential of the property was seriously adversely impacted by this for obvious reasons.

Accordingly, during its 2012 fiscal year Caesars recognized that it was time to bite the bullet, performing an impairment assessment on the Macau Land holding and recording an impairment charge in its financial statements of $101 million in the fourth quarter of calendar 2012. At that point too the company began discussions with interested investors regarding its sale, and accordingly classified the property as “held for sale” in its consolidated balance sheets at the end of 2012, and since on June 30th, 2013.

The new agreement with Pearl Dynasty calls for initial deposits to be paid this week of US$65.7 million, with plans to complete the transaction within 90 days. Caesars Entertainment could keep US$43.8 million as a penalty if the deal fails to close on schedule. Proceeds of the sale will be used to pay down some of Caesars’ debt, which today has over US$23 billion of debt, and whose business performance has suffered during the difficult business conditions the US experienced through the 2008 financial crisis and its aftermath.

While Caesars is the largest casino operator in the U.S., with properties in Las Vegas, Atlantic City, New Jersey, Indiana, Louisiana, Mississippi and several other states, it is the only major U.S. casino company that was particularly hurt during the recession because it does not have a single casino in Macau. Rival companies MGM Resorts International, Wynn Resorts and Las Vegas Sands Corp all have, currently booming, casinos in the former Portuguese gambling enclave of Macau, which is now part of China and just one hour away from Hong Kong by sea.

Caesars, which had been privatized by TPG, Apollo Global Management, and the Blackstone Group in 2006, first became a public company again in February of 2012, when it completed a “structural” Initial Public offering (IPO). In doing so it only offered directly to the public 1.8 million new shares of its common stock from treasury at US$9 per share for net proceeds of just US$15.2 million. At the same time, however, there was also a secondary offering of shares registered under the offering, including those held mainly by the Blackstone Group’s investment, representing approximately 27.8% of the Company’s stock, thus subsequently providing a substantial public float and liquidity for the newly public entity again, as well as an exit for Blackstone.

–

Illustration / Getty

–

Online Gambling In the Untied States

The US Federal Government has for a long time resisted the legalization of online gambling at the federal level, and has taken a very hard line on it until quite recently. Whether there will be a softening in the light of new State laws which are now setting out to sanction it at the State and local level will be a fascinating question. In part it will depend on the advancement of the state of the art of certain internet technologies – being able to identify the location of, and then presumably block, out-of-state gamblers who are on-line, for example.

In strategic moves recently both the State of New Jersey and Nevada have indicated they would like to co-operate with each other in a move towards state-licensed online gambling facilities. In his last quarterly earnings conference call, on July 29th, Caesars CEO Gary Loveman also pointed out that the company had just purchased the, not-for-real-money, but very prestigious online poker site World Series of Poker during the quarter. To date Delaware, Nevada and New Jersey have all passed bills to legalize online gambling.

Other states have similar such legislation in the works. Morgan Stanley is apparently now estimating online gaming could generate US$9.3 billion in revenue in the U.S. by the year 2020. As a result of some of these potential moves the shares of Caesars Entertainment have tripled since last November, managing to look beyond difficult existing economic conditions – with quarterly losses still currently exceeding US$200 million.

–

–

Caesars Files A Prospectus

To capitalize on some of these trends, recently on July 10th 2013 Caesars filed an S-1 registration statement with the Securities and Exchange Commission (SEC), a.k.a. a Preliminary Prospectus, laying out its plan, and seeking regulatory approval for, the company’s newly minted online gambling business development plans to raise up to US$1.18 billion of new equity shares in public markets. Under the terms of the proposed offering, existing Caesars Entertainment shareholders will receive the right to buy one share of Caesars Acquisition Company (CAC) stock for each of their Caesars shares, for a total of up to 125.4 million shares at US$9.43 per share. Both controlling shareholders TPG Group and Apollo Global Management have indicated in the Preliminary Prospectus they currently intend themselves exercise rights for at least an aggregate of US$500 million of the new shares in CAC, so it should have reasonable prospects for success.

CAC will then invest all of the proceeds jointly with Caesars itself in a vehicle called Caesars Growth Partners LLC, (Growth Partners) for development of what it calls high-growth entertainment assets, including on-line gambling. According to the Preliminary Prospectus, Growth Partners’ new business activities are expected to initially consist of Caesars Interactive Entertainment, Inc. (Caesars Interactive) and also the development of certain new casino properties. Caesars Interactive has three businesses; the first is social and mobile games, the second is the World Series of Poker which it recently bought; and finally the third is the, regulated, online, real money business of gaming as it becomes legal in various parts of the United States – the real elephant in the room if you will.

The casino properties being contributed are – Caesars’ existing interests in the Planet Hollywood Resort and Casino located in Las Vegas, a new casino to be developed in Baltimore, Maryland and finally, as well, a 50% interest in the management fee revenues received by Caesars existing operating management company from its properties. In addition, Growth Partners is expected to own a portfolio of debt investments consisting of notes previously issued by the operating management company. The Preliminary Prospectus states that these notes will provide Growth Partners with additional cash flow to fund future investment and acquisition opportunities.

Carve Outs with a Purpose

The purpose of these carve-outs from the main public company, which is what they are putting it bluntly, is presumably to insulate the new businesses from some of the debt problems of the parent, to enable them to attract capital on better terms and then to accord the new publicly listed entity itself a higher multiple as well as a result. This is financial engineering at its most effective perhaps; large in scale, focused in its purpose and completely transparent at all points. At least it will be if the proposed new share issue is a success. The bottom line is even if the proposed share issue is a success the business itself will only really benefit if the new online gambling developments really do take off, as then it will undoubtedly be a huge success indeed.