Caesars Entertainment had its debt outlook downgraded today by Fitch Ratings. Fitch Ratings expressed concerns about the company’s ability to meet its debt obligations or violate its loan covenants. Fitch predicts negative cash flow for the company into 2015 and beyond. The company carries debt in the neighborhood of $20 billion.
Fitch maintains its ‘CCC’ grade of the long term debt. A ‘CCC’ grade implies “currently vulnerable and dependent on favorable economic conditions to meet its commitments”. Fitch warned that if market conditions do not improve that they may downgrade the debt to ‘CC’ which would imply “highly vulnerable, very speculative bonds” which is a rating reserved for companies where there is a high risk of default.
Caesars Entertainment went public for $9 a share in February 2012. After nearly doubling its IPO price, the stock has been on a steady decline and closed at $6.48 today. The stock price is down 23% in the past 30 days and is down 45% in the past 90 days.
Fitch Suggests Sale of Interactive Unit
The Caesars Interactive unit was mentioned in this negative outlook. Fitch suggested that Caesars Interactive holds most of the company’s equity value. Caesars Entertainment does not own Caesars Interactive in its entirety. Dan Gilbert’s Rock Gaming owns about 9500 shares of the company that were valued at $60.8 million in April 2012. Rock Gaming also has an option to purchase 3140 more shares for $19.2 million. Rock Gaming and Caesars Entertainment operate Horseshoe Cleveland in a joint venture. The two companies have also joined forces to develop casinos in Cincinnati, Ohio and Baltimore, Maryland.
Fitch Gaming suggested that a sale or other monetization of Caesars Interactive may be necessary to prevent a restructuring of the company’s debt or outright default. Caesars Interactive owns the World Series of Poker brand as well as Playtika. The World Series of Poker is played each year at Rio Las Vegas. There is also a World Series of Poker circuit that travels across the world during the off season. In addition to live tournaments, the World Series of Poker brand is used in the UK as a real money online poker room. The brand is also expected to be used in Nevada when online poker goes live later this year. Playtika is a social media casino company that was acquired in May 2011 for about $85 million.
Absent of major online poker legislation on a federal level, the only way to monetize Caesars Interactive would be to sell all or part of their holdings in it. This could be done in a few ways.
Any buyer would need to have access to a convention center that could accommodate the ever growing summer World Series of Poker event. Rio Las Vegas has 160,000 square feet of convention space and has just about outgrown it. Parking is also a concern. Rio offers a large convention center parking lot for poker players. Any new venue would need the same convenient parking situation.
Rock Gaming appears to be in a strong financial position and is entering emerging markets in Ohio and Maryland. The first logical step would be to offer Rock Gaming more equity in the company or an outright acquisition. The problem with that solution is that Rock Gaming does not have any Las Vegas presence. The company would be forced to lease space in Las Vegas to keep the tournament there. Moving the World Series of Poker outside Las Vegas may affect participation.
Another idea would be to take the interactive unit public much like how Caesars Entertainment did in 2011. The most lucrative solution may be to find a competitor in Las Vegas to buy the assets.
Wynn Resorts has a deep interest on poker. The poker room at Wynn Las Vegas is one of the highest end poker rooms in the world. The company has also shown an interest in online poker. In March 2011, the company announced a potential online poker partnership with PokerStars, the world’s largest online poker room. That partnership was dissolved less than a month later when the Black Friday indictments were unsealed. The Wynn has 223,000 square feet of convention space available. Encore would offer another 60,000 square feet of space.
MGM Resorts has several casinos with a large convention center. The most obvious choice would be Mandalay Bay. In addition to ample parking, Mandalay Bay’s convention center offers 1,000,000 square feet of space. MGM Resorts has entered into a partnership with Boyd gaming and Party.BWIN to offer online poker in Nevada and potentially other states in the future upon regulation. The WSOP brand would be a perfect fit to this partnership.
Las Vegas Sands
Las Vegas Sands is the parent company of Venetian and Palazzo. Although Venetian has one of the highest rated poker rooms in Las Vegas, the company would not be a good fit for Caesars Interactive. That is because Las Vegas Sands’ CEO Sheldon Adelson is an outspoken opponent of online gambling in any form, even online poker.
WSOP Sale Makes Rio Expendable
There have been rumors flying for years about the sale of Rio. The concern has always been where the World Series of Poker would be played if Rio was sold. Caesars Palace has more convention space than Rio but the parking situation would make hosting the WSOP impossible. None of the other Caesars Entertainment properties in Las Vegas have the convention center space and parking needed to hold the annual event. Industry observers have speculated this has prevented Caesars Entertainment from selling Rio. If the company were to sell its stake in Caesars Interactive then the company could also sell Rio. Estimates put the Rio’s value around $500 million. While that is only 2.5% of the overall debt carried by Caesars, it would be more than enough to service the debt until a better solution could be found or the economy turned around.