Caesars cascades into public markets

Caesars Entertainment is public, but just barely. After a one-day delay because of hang-ups with regulators, Credit Suisse and Citigroup finalised pricing last night of 1.811m shares at US$9, the midpoint of indicative guidance and giving the world’s second-largest casino operator an initial equity market capitalisation of just US$1.125bn.

When juxtaposed against US$19.6bn of debt and the small, 1.4% initial float, the offering is one of the most unusual and potentially controversial IPOs in the history of capital markets. The IPO itself was conducted on behalf of co-investors that invested alongside Apollo Group and TPG in the leveraged buyout back in 2008.

As a gesture to gain liquidity, the co-investors gave Caesar’s the shares sold in the offering but did not receive any proceeds as part of the arrangement. Those investors, which have not been not identified, are immediately free to sell half of their remaining 24.2m shares and the other half after 180 days. Paulson & Co, a 9.9% holder, is also free to sell 12.4m shares that the New York-based hedge fund holds.

Caesars itself is prohibited from selling stock for 180 days, unless the sale is used to repay existing debt or is part of a debt-for-equity exchange. Not surprisingly, the company yesterday launched marketing of a US$1.25bn, eight-year senior secured note offering, scheduled to price today, as part of a broader debt restructuring referenced in the IPO prospectus.

Apollo and TPG will not be able to sell the combined 87.6m shares, representing a 70.1% stake, they own under the current registration statement.

The obvious question is why go through such a protracted and convoluted exercise for such a small raise?

By almost all accounts, the valuation implied on the IPO is stretched. Moreover, unidentified holders that own 24.5m shares (US$220m) are free to sell on day one, creating an overhang and almost certainly capping equity upside.

“The fact that they’re doing such a small offering bodes poorly for the outlook of the company,” said Morningstar equity analyst Chad Mollman, who labelled the IPO “unattractive”. “It basically says that they don’t have the interest level to do a US$500m-plus offering. It’s not a positive to see the world’s second-largest casino operator do a US$20m offering.”

The IPO values Caesars at 12 times EV-to-Ebitda over the trailing 12 months ended September 30, roughly in line with MGM. The comparison is unwarranted because the latter has exposure to faster-growing Asian markets, while the former relies almost exclusively on a domestic market where casino construction has become “Starbucked”, Mollman believes.

Even if enough investors are believers in the equity, there are reputational risks to consider. Credit Suisse and Citigroup, and, by association, second-line bookrunners Bank of America Merrill Lynch and Deutsche Bank, better hope against a cascade of selling on the open today.

Caesars needs at least 400 shareholders simply to qualify for a Nasdaq listing. Unfortunately, some fear that retail investors will bear the brunt, as it is illogical to believe any institution will commit to the small ticket orders necessary to reach the minimum threshold.

“It’s a tough fact pattern if that is the case,” noted one rival banker. “You just kill your retail if you know there are potentially sizeable sellers.”