Caesars Entertainment Corporation (NYSE:CZR) reported fourth-quarter earnings after the bell Monday, and once again, poor earnings combined with Casears’ increasing debt to cast a pall over CZR stock.
Caesars’ fourth-quarter revenues did improve 6% year-over-year to $2.13 billion, but that figure still fell short of analyst expectations of $2.22 billion. (Full-year earnings were up 3.6% to $8.51 billion.)
On the earnings front, CZR lost $1.01 billion for the fourth quarter — though if you’re looking for a bright side, that’s better than the $1.75 billion Caesars lost in the year-ago period. Putting an even greater shade of that is that on a per-share basis, Caesars lost $7, but analysts were expecting a deficit of just $1.65 per share.
What makes Caesars’ quarterly numbers even worse — and what makes CZR stock look all that much worse — is the massive pile of debt the company is accumulating.
Caesars (CZR): Debt and a (Bankruptcy) Plan
As of September 2014 (the most recent data available), the company had over $28 billion in liabilities, with nearly $23 billion of that coming in long-term debt. Also at that time, total assets were at $24.5 billion.
During that September earnings report, Caesars Entertainment posted a loss from operation of $327 million while posting interest expense of $708 million.
Not only is the company not making money from operations, but the interest on their liabilities is absolutely killing them. Management just laid out a plan to reduce some of that debt, but it will likely come at the expense of shareholders.
Caesars Entertainment has a very complicated business structure which owns and operates 50 casinos worldwide. Caesars calls itself a “holding company” which owns Caesars Entertainment Operating Company (CEOC), Caesars Entertainment Resorts Properties LLC and Caesars Growth Partners. CEOC is in bankruptcy.
Reuters spells out how the proposed plan would work:
“Under the proposed plan, Caesars Entertainment Operating Co., the bankrupt unit would be split into an operating company that runs 38 casinos in 14 states and a property company that owns the real estate. …
In exchange for the $6.3 billion they are owed, a group of creditors known as the first-lien noteholders would own CEOC when it exits bankruptcy. The noteholders would also own about 70 percent of the property company, with junior creditors getting the rest in exchange for their $5.2 billion in debt.
The bankruptcy courts have not yet approved this deal, but first-lien holders had, prior to CEOC entering bankruptcy. But then, why wouldn’t they? They seem to be getting a sweetheart deal.
By my estimates, current CZR stock holders will end up with the short end of the stick. As I mentioned, Caesars currently owns and operates 50 casinos worldwide and just under $23 billion in long-term debt. This proposed deal will take away $18.4 billion in debt, but also put ownership of CEOC and 38 casinos into the hands of the debtholders, leaving behind $4 billion in debt … but also just 12 casinos.
Anyone currently owning shares of Caesars needs to pay very close attention to this developing story. Or better yet, take whatever money you have left and leave the craps table. From the start, when investors took Caesars private back in 2008 through a $30.7 billion leverage buyout, this company has not been very shareholder-friendly.
It doesn’t look like that’s changing anytime soon.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.
