CAESARS ENTERTAINMENT RACETRACKS ARE PART OF A PRECARIOUSLY LEVERAGED BEHEMOTH

Caesars Entertainment Corporation (CEC)–formerly Harrah’s Entertainment—was acquired on January 28, 2008 by affiliates of Apollo Global Management, LLC and TPG Capital, LP in an all-cash transaction valued at approximately $30.7 billion, including the assumption of $12.4 billion of debt and the incurrence of approximately $1.0 billion of acquisition costs. As a result, the stock is no longer publicly traded.

CEC is the world’s largest casino company and owns two Thoroughbred racetracks outright (Harrah’s Louisiana Downs and Thistledown in Cleveland, Ohio) and one harness track (Harrah’s Chester in Pennsylvania). In addition, it owns a half interest in Turfway Park in Northern Kentucky near Cincinnati, Ohio. Keeneland racetrack in Lexington, Kentucky, owns the other half.

CEC is in a dilemma. On the one hand, it arguably has the best operating management of any casino company. Gary Loveman, the Chairman and Chief Executive Officer, is a former Harvard Business School marketing professor. When Dr. Loveman joined CEC (Harrah’s Entertainment at the time), his associates perfected the player rewards program—called Total Rewards—into perhaps the world’s best. Operationally, CEC has as a cadre of executives whose skill sets are as good as they get in targeting customers with the right messages and player inducements.

On the other hand, when Apollo Global Management and TPG Capital acquired CEC, they saddled the company with so much debt that it currently approaches a negative net worth. Not only was CEC loaded down with debt, but the timing could not have been worse. The purchase of CEC corresponded with the recession that pummeled gaming and leisure industries.

No matter how skilled CEC operating executives are, they cannot perform a miracle. For instance, in 2010, CEC had a profit of $532.3 million from operations, but when the interest on the debt was accounted for, CEC lost an astounding $1.292 billion before taxes. The interest expense was nearly $2 billion.

It is improbable that CEC will be able to earn its way out from under this heavy burden of debt and issuing new common stock would be hard to do at best. If CEC has to begin selling assets to pay down its debt and survive, it will end up as a much smaller entity.

Most of CEC’s racetracks would be attractive to buyers. Harrah’s Louisiana Downs and Harrah’s Chester are racinos and Thistledown is scheduled to become one. Thus these should be marketable. Turfway Park would be appealing to a buyer only if the Commonwealth of Kentucky approves alternative gaming at racetracks.

Copyright © 2011 Horse Racing Business

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