Bloomberg News

Caesars IPO Discount May Come Up Short as More Share Sales Loom

February 07, 2012

Feb. 7 (Bloomberg) -- Caesars Entertainment Corp., the casino chain saddled with more than $22 billion in debt, is planning an $18.1 million initial public offering that some analysts say doesn’t offer enough of a discount to offset the threat of further stock sales by private-equity owners.

Caesars, taken private in a $30.7 billion buyout by Apollo Global Management LLC and TPG Capital in 2008, is selling 1.81 million shares at $8 to $10 each, regulatory filings show. At the midpoint of the range, the company would be valued at 19 percent less than in a failed 2010 IPO attempt, according to data compiled by Bloomberg based on adjusted pretax earnings.

While the discount may lure some investors, the potential sale by the Las Vegas-based company’s owners of more than $300 million in shares may subsequently weigh on the stock price. Caesars postponed pricing the IPO until today after planning to complete the sale yesterday, Bloomberg data show.

“What Caesars has done is find a way to get the IPO through the market, albeit at a smaller scale,” said Matt McCormick, who helps oversee about $5.1 billion at Bahl & Gaynor Inc. in Cincinnati. “Investors should understand the dilutive effect. It would give a lot of people cause for concern.”

The offering gives firms such as Paulson & Co., the hedge fund run by billionaire John Paulson, a chance to exit and potentially return cash to investors. Existing Caesars investors may sell 34.7 million shares after the offering, according to the IPO prospectus.

Rights to Sell

Shareholders including Goldman Sachs Group Inc. and Deutsche Bank AG have the right to sell 22.3 million shares, equal to $223 million in stock at the top end of the IPO range. Paulson & Co., which owns 9.9 percent, has the right to sell 12.4 million shares. Apollo and TPG aren’t selling shares in the current offering and aren’t among the funds that have registered for additional sales.

Caesars pulled a registration filing to sell as much as $500 million in shares following the planned IPO, according to a person with knowledge of the matter. An amended filing for the offering yesterday didn’t mention the $500 million registration.

Apollo, TPG and firms that co-invested in the deal will own about 70 percent of Caesars common stock after the IPO, the filing shows. The companies announced the deal for Caesars, then known as Harrah’s Entertainment Inc., in 2006, in the midst of a record buyout boom.

Enterprise Value

About $1.6 trillion in leveraged buyouts were completed from 2005 to 2007, according to Preqin Ltd., a London-based research firm. Chief Executive Officer Gary Loveman led Caesars during the takeover, which at $30.7 billion, including debt and fees, made it the biggest U.S. casino buyout.

The midpoint of the price range gives Caesars an enterprise value of $22.5 billion, or 11.8 times adjusted earnings before interest, taxes, depreciation and amortization of $1.92 billion, and excluding costs such as one-time acquisition expenses, the filing shows. That compares with a valuation of 14.6 times Ebitda in the failed 2010 IPO, when the largest U.S. casino operator sought to raise $531 million.

While Caesars has slashed costs since the buyout, sales were little changed at $6.7 billion in the nine months ended Sept. 30, and the company still doesn’t have casino operations in Macau, the world’s largest gambling market, where Las Vegas Sands Corp. and Wynn Resorts Ltd. get the bulk of their sales.

‘Aggressive’ Valuation

That may weigh on the company’s valuation, said Chris Snow, a senior analyst at CreditSights Inc., a New York research firm.

“The long-term debate about whether they deserve the multiple is valid” because Caesars doesn’t have casino operations in Macau, said Snow. The valuation is “pretty aggressive.”

Caesars gets more than 90 percent of its sales from the U.S., with more than 50 properties across the country. Revenue in Las Vegas, Caesars’ biggest market, rose 6.5 percent in the nine months through September as sales in Atlantic City and other smaller U.S. markets sank. By comparison, total gambling revenue in Macau surged 42 percent for all of 2011.

A spokesman for Caesars declined to comment.

On a non-adjusted basis, Caesars’ enterprise value is 12.5 times Ebitda, little changed from 2010, when the company sought a valuation of 12.4 times pretax earnings, and more than Wynn, which traded at 10.5 times Ebitda as of Feb. 3. Las Vegas Sands traded at 15.8 times Ebitda.

U.S. Economy

Caesars stands to benefit as the U.S. economy improves, said Dennis Farrell, a casino-debt analyst with Wells Fargo Securities LLC in Charlotte, North Carolina. American gross domestic product grew at a 2.8 percent annual rate in the final quarter of 2011, the fastest pace since the second quarter of 2010.

“If you really believe the U.S. economy is really going to improve, the company has removed a lot of costs from their capital structure and their operations,” Farrell said.

MGM Resorts International, a rival of Caesars which also operates mainly in the U.S., traded at about 19 times 12-month Ebitda as of Feb. 3. In contrast, Wyomissing, Pennsylvania-based Penn National Gaming Inc. had an enterprise value of about $5 billion, or 7 times trailing 12-month Ebitda, Bloomberg data show.

Caesars plans to list shares on the Nasdaq Stock Market under the symbol CZR. They previously traded on the New York Stock Exchange under the symbol HET until January 2008. Credit Suisse Group AG and Citigroup Inc. are leading the IPO. The company plans to use the proceeds of the offering for general corporate purposes including development projects, possible acquisitions and maintenance capital expenditures.

While the IPO may be an easy sale “because it’s so minuscule,” the expectation of future offerings may limit gains in the shares, said David Bain, a Newport Beach, California- based senior analyst at Sterne Agee & Leach Inc.

“As the stock goes up, we’re sitting here bracing ourselves for another sale,” said Bain. “It is a tough story unless you assume the domestic economy comes roaring back.”

--With assistance from Anjelica Tan in New York. Editors: Julie Alnwick, Katherine Snyder

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net


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