The looters of Caesars Palace, whom we recently discussed, are having second thoughts...
On Monday, it was announced that Caesars Entertainment Corp. (Nasdaq: CZR) would acquire affiliate Caesars Acquisition Co. in a stock-for-stock merger.
The move will reassemble some of the pieces that were stolen by the company's private equity owners in an ill-advised attempt to restructure the company's debts on the backs of its creditors.
The merger will consolidate the company's stake in properties such as Planet Hollywood, Bally's Las Vegas, the new Horseshoe Casino in Baltimore, and its Internet gaming businesses with its flagship Caesars Palace property in Las Vegas.
And create a second buy opportunity...
The Full Story... and How to Profit
Caesars Acquisition Co. was formed in 2013 to invest in Caesars Growth Partners, LLC, a newly formed company to which Caesars Entertainment started selling assets at below market prices in an effort to pressure bondholders into an unfavorable debt restructuring that would leave its private equity owners' shareholdings with minimal damage.
Last Friday, the company announced a restructuring deal with some of its senior creditors that would include a Chapter 11 in mid-January. The private equity owners are still trying to co-opt senior bondholders into a bankruptcy restructuring that would leave junior bondholders out in the cold.
However, cooler and more ethical heads are going to prevail...
The merger announced today is the first step in unscrambling the eggs that were broken when the private equity owners opted to travel down the dark side rather than take the high road when it became obvious the company couldn't repay its $18.4 billion of debt.
Rather than start engaging in massive debt-for-equity swaps that would have begun deleveraging the balance sheet and restoring the company to health, the owners decided to form Caesars Acquisition and Caesars Growth Partners, take big ownership stakes in these companies, and then sell some of Caesars' best assets to these affiliates at below-market prices with the approval of friendly directors and phony fairness opinions.
They also entered into a series of negotiations with both senior and junior creditors in which both groups were willing to exchange debt for equity on reasonable terms if the sponsors were prepared to put a fair deal on the table.
Thus far, however, the sponsors have refused to bargain in good faith and triggered a series of lawsuits that question their integrity and motives. Today's merger suggests that they are starting to appreciate the damage their actions could cause their franchises and pocketbooks.
The merger will go a long way to restoring the status quo and making the company's valuable assets available for creditors. The junior creditors are still looking at big losses. There are $5 billion of second lien notes currently trading at below $0.20 on the dollar. These bonds did not rally on the merger news because investors know that the sponsors are still intent on shortchanging these bondholders.
But these bonds are going to be exchanged for equity in the upcoming bankruptcy and once the smoke clears, they are likely to be worth a lot more than their current trading price because the assets that were stolen from the company have been returned. This likely would have happened in bankruptcy court anyway, but the merger accelerates the process.
A bankruptcy restructuring will allow the company to stop paying more than $500 million of annual interest on these second lien notes. Turning massive amounts of debt into equity should ignite a virtuous deleveraging cycle for the company, which has one of the leading gaming franchises in the world.
There are many examples where companies that deleverage have seen their stocks appreciate sharply, and indeed, this is a great chance to set up this profit play on the news...
Good Time to Buy Caesars
On Tuesday, CZR stock was up over 13% in mid-day trading from its Friday close.
Investors know that a massive dilution is coming, but they also know that the company won't have to spend hundreds of millions of dollars on interest and can expand into Asia and potentially into other promising jurisdictions.
The long-overdue deleveraging of the company is much closer today after the sponsors decided to stop breaking eggs.
I would be a buyer both CZR Second Lien Notes due 2018 at $0.18 on the dollar or under and CZR stock at $16.00 or under.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.