Caesars' Casino IPO May Be a Huge Gamble

| About: Caesars Entertainment (CZR)
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By Brian “Newman” Rayl

Harrah’s Entertainment Inc, the owner and host of The World Series of Poker, is going to begin trading publicly again through the NASDAQ on Friday, November 19th (the last of several IPOs this week) under the name Caesars Entertainment Corp, ticker symbol CZR. The company plans on selling 31.3 million shares for $15-$17 each, raising as much as $532.1 million.

Harrah’s, which owns or manages more than 50 casinos in 12 states and seven countries, is burdened with close to $20 billion in debt. A lot of it was piled on by the two private equity firms — Apollo Management Group and Texas Pacific Group — that took the company private three years ago in a $30.7 billion leveraged buyout. The two companies plan to keep majority control of it after the IPO and maintain control of about 80% of the stock.

Is the timing right for this type of IPO?

In a recent securities filing, the company said it lost $634.4 million during the nine months that ended Sept. 30. Revenue over the same period totaled $6.7 billion, down from $6.8 billion in the first nine months of 2009. For the quarter, It lost $165 million. While this may not look too bad, it is certainly not something new. The company touted $10.8 billion in revenue in 2007 and has been dropping ever since. In 2008, revenues dropped to $10.1 billion and had an even steeper decline in 2009, plummeting 12% to $8.9 billion.

When looking at CZR’s competition, there are some bright spots. Las Vegas Sands' (NYSE:LVS) stock price has gone from $5.10 to $48.42 over the past two years, giving investors a nearly 850% gain. Wynn Resorts Limited (NASDAQ:WYNN) has appreciated from $44.76 to $111.14 or 148% over the same time frame. MGM Resorts International (NYSE:MGM) has risen slightly as well, moving from $10.45 to 12.31 over the past 2 years. The economy has certainly begun picking up from its lows of 2009, but has the interest returned to gambling yet? Indicators are sending mixed signals. According to Bloomberg, Atlantic City casino gambling fell 12% in September while Las Vegas Strip revenues rose 2.8% in the same month.

It would be one thing if the proceeds from the IPO were planned to be used towards paying down some of its massive debt in order to reduce their interest costs. The company is currently spending approximately 22% of its revenue on interest payments, a number that has increased as revenues have fallen. Instead, the company is planning on further expansion. Last year, construction was halted on a tower addition to Caesars Palace on the Las Vegas Strip and the company now has plans to resume construction to finish. The company has made a number of aquisitions over the previous 3 years even while facing this mountain of debt and falling revenues.

Kenney Rogers sang in his famous song “The Gambler”: “You’ve got to know when to hold ‘em. Know when to fold ‘em. Know when to walk away. Know when to run.” When it comes to CZR, I say run.

Disclosure: No position in any securities mentioned