Caesars Doubles in Debut After Slashing IPO From 2010 Effort

Wednesday, 08 Feb 2012 01:35 PM

 

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Caesars Entertainment Corp., the U.S. casino chain with more than $22 billion in debt, almost doubled in its trading debut after selling stock in an initial public offering a fraction of the size of its failed 2010 effort.

The stock rose as high as $17.90 and tripped circuit breakers, valuing Caesars at as much as $2.24 billion. The volume was more than three times the number of shares available for trading as of 12 p.m. New York time. Caesars raised $16.3 million selling less than 2 percent of its shares at $9 each.

That compares with the $531 million IPO scrapped in November 2010. The new offering paves the way for the sale of additional shares by investors in Caesars’ 2008 buyout, led by Apollo Global Management LLC and TPG Capital, and the biggest in history for a U.S. casino. Owners may seek to sell stock valued at more than $600 million at the high end of today’s trading.

“The float is small, so not too much surprises me” about the stock gain, David Bain, a Newport Beach, California-based senior analyst at Sterne Agee & Leach Inc., said in an e-mail. “Where shares trade today is likely not a good benchmark for future Caesars valuation.”

Caesars, trading on the Nasdaq Stock Market under the symbol CZR, originally offered the shares for $8 to $10 apiece. The Las Vegas-based company priced in the middle of the range, selling 1.81 million shares, according to a statement.

Rights to Sell

Existing Caesars investors may sell 34.7 million shares after the IPO, according to the prospectus. That gives firms such as Paulson & Co., the hedge fund run by billionaire John Paulson, a chance to exit and potentially return cash to investors. Paulson & Co., which owns 9.9 percent, has the right to sell 12.4 million shares.

Shareholders including Goldman Sachs Group Inc. and Deutsche Bank AG have the right to sell 22.3 million shares. Apollo and TPG didn’t plan to sell shares in the IPO 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 IPO, a person with knowledge of the matter said this week. An amended filing for the offering on Feb. 6 didn’t mention the $500 million registration.

“They weren’t going to be able to get anything done unless they did an unbelievably small offering,” said Chad Mollman, an equity analyst at Morningstar Inc. in Chicago. “There’s a huge overhang on the stock” because of potential future sales, Mollman said.

Buyout Boom

Credit Suisse Group AG and Citigroup Inc. led the IPO. The company plans to use proceeds for general purposes including development projects, possible acquisitions and maintenance expenses.

Chief Executive Officer Gary Loveman led Caesars during its takeover, announced in 2006 in the midst of a record buyout boom. About $1.6 trillion in leveraged buyouts were completed from 2005 to 2007, according to Preqin Ltd., a London-based research firm. Caesars, then known as Harrah’s Entertainment Inc., traded on the New York Stock Exchange under the symbol HET until 2008.

Apollo, TPG and firms that co-invested in the buyout were poised to own about 70 percent of Caesars common stock after the IPO, the filing showed.

Enterprise Value

At the high end of today’s trading, Caesars has an enterprise value of $23.6 billion, or 12.3 times adjusted earnings before interest, taxes, depreciation and amortization of $1.92 billion, 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 that sought to raise more than 30 times the size of this offering.

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.

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

“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.”

Vegas, Atlantic City

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.

On a non-adjusted basis, Caesars’ enterprise value is 13.1 times Ebitda, compared with 2010, when the company sought a valuation of 12.4 times pretax earnings. That’s more than Wynn, which traded at 10.5 times Ebitda as of Feb. 3. Las Vegas Sands traded at 15.8 times Ebitda.

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 that 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.


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