Caesars to repurchase Caesars Acquisition Co.
Several moves by Caesars Entertainment have begun to clarify the operator’s picture as it prepares for a prepackaged Chapter 11 bankruptcy filing, possible as early as the end of next week.
The operator, the most indebted in the industry with more than $25 billion in debt load resulting from its $30 billion leveraged buyout in 2008 by Apollo Global Management and TPG Capital, reports that negotiations with senior creditors, which have been ongoing since September, are winding down. Caesars officials say the impending deal will slash the debt of its largest unit, Caesars Entertainment Operating Company (CEOC), fro $18.4 billion to $8.6 billion.
The only problem with the deal is convincing a majority of CEOC bondholders to agree. In a filing with the Securities and Exchange Commission, Caesars reported that “more than 39 percent” of its creditors have agreed to the restructuring plan. Caesars says it must get that support to 60 percent by January 9 for the restructuring plan to become effective. A Caesars spokesman declined comment to reporters on the likelihood that will occur.
In the latest new development. Caesars announced that it will buy back Caesars Acquisition Company, an affiliate it had spun off last year, in an all-stock purchase that will allow the company to restructure debt without the need of outside financing. The affiliate has acted as an agent to purchase major Caesars properties such as Planet Hollywood in Las Vegas and Horseshoe Baltimore by another Caesars spinoff, the real estate investment trust Caesars Growth Partners.
According to the company, the repurchase of Caesars Acquisition will allow cash to be funneled to CEOC creditors in support of the restructuring plan. CEOC would be converted into a publicly traded real estate investment trust, which would own the major properties and lease them back to Caesars Entertainment, which would serve as the operating company.
The casinos would sign 15-year leases with the REIT with four five-year renewals, and Caesars Palace, the operator’s flagship, would have a lease separate from the other companies. Caesars Palace would pay at least $160 million in rent to Caesars Entertainment; the other properties would pay a total of $475 million a year in rent. The operating company would be required to make $175 million per year in capital improvements.
Analysts, who say cash going to major creditors will cancel out much potential litigation and smooth the path to the bankruptcy, lauded the plan. “The proposed transaction will partially reduce the overhang related to the improper asset transfer/sale claims made by certain CEOC creditors,” said Fitch Ratings Service analyst Alex Bumazhny in a statement. “Several hurdles remain before the plan can be implemented.” Bumazhny has been among the most critical of Caesars’ restructuring efforts.
Caesars Entertainment will exchange 0.664 of its Class A common stock for each outstanding share of Caesars Acquisition. In response to the deal, Caesars Entertainment shares rose 15 percent and Caesars Acquisition was up 5.8 percent. Ninety percent of Caesars Acquisition shareholders are also Caesars Entertainment shareholders.
The spinoff has raised $1.17 billion. Caesars Entertainment CEO Gary Loveman will be chairman and CEO of the newly merged company, which will have a market value of $3.2 billion.
“The merged company will be the preeminent gaming and hospitality company in Las Vegas,” said a statement from Caesars Entertainment. “It will operate Caesars Palace and own 11 properties there, including nine casino resorts and the Linq promenade and High Roller observation wheel. The merged company will also own CIE, Harrah’s New Orleans, Harrah’s Atlantic City, Harrah’s Laughlin and Caesars Acquisition’s current equity interest in Horseshoe Baltimore. All of the company’s properties will remain connected via the Total Rewards loyalty network.”
“The merger of Caesars Entertainment and Caesars Acquisition solidifies our focus on owning assets in destination and high-growth markets and businesses, while maintaining the benefits of operating our network and the Total Rewards loyalty program,” said Loveman. “Upon completion of the merger and restructuring, Caesars Entertainment Corp. entities will be financially strong, with significantly reduced leverage and a much simpler and straightforward corporate structure.”
The announcement by Caesars came after Bloomberg reported that the operator has struck a deal with some senior creditors, in a restructuring-support agreement that will commit bondholders to vote on a reorganization plan to which they have already agreed. According to the report, if the parties sign the document, it would require CEOC to enter Chapter 11 proceedings by January 15.
The agreement would automatically halt a lawsuit brought by lower-level creditors in Chancery Court in Delaware, which seeks to force CEOC into receivership. Chancery Judge Sam Glasscock has slated a hearing for mid-January on a motion by Caesars for dismissal of the lawsuit, on the basis that any such case must be heard in New York per a prior agreement.
The company also must still deal with two other ongoing lawsuits, one from second-tier bondholders and another from senior-level creditors.