Millions and Billions of Problems for This Casino
Feb 13th 2012 9:41AM
Updated Feb 13th 2012 4:16PM
On the first day of trading, Caesars Entertainment (NAS: CZR) was shown more love by investors than the real Caesar ever received. The stock closed the opening day up an astonishing 71%. But as bullish as these investors were, don't follow the mob to the Colosseum or you may be the one getting slaughtered by the gladiators.
Millions of problems
In 2010, Caesars first decided to return to the public markets and set out to sell 31.3 million shares for $15 to $17 apiece. When the company realized the market lacked interest at that price, it pulled back and canceled the IPO. On Wednesday, Caesars offered just 1.8 million shares at a price of $9. And the share price was bid up at one point even above $17.
OK, that's pretty good. But the 1.8 million shares offered today only account for 1.4% of the company. The IPO offering had a provision that allows other private investors to sell their shares, which by my calculations add up to almost another 37 million shares from just John Paulson, underwriters, and other co-investors. These are shares held by the investors that took the company private five years ago. They have taken a bath on the deal and now want to get whatever money they can. Conceivably, the investors who want out now know the company is falling apart.
Billions of problems
At first look, the company may not seem so bad. It has $28.9 billion in assets, of which $1.15 billion is in cash. But as you move down the balance sheet and see $1.79 billion in current liabilities and $19.6 billion in long-term debt, a negative opinion begins forming. Then you realize that the company doesn't have enough cash to pay its current liabilities, and that both current liabilities and long-term debt have grown since the last six months reported -- and a concrete sell decision begins to harden.
Seeing what other casino operators' debt levels are can help put Caesars' situation in perspective. MGM Resorts (NYS: MGM) , Las Vegas Sands (NYS: LVS) , Boyd Gaming (NYS: BYD) , and Penn National (NAS: PENN) have debt-to-cash ratios of 6.8-to-1, 2.4-to-1, 18-to-1, and 9.8-to-1, respectively. Compared to the competition, Caesars' long-term debt-to-cash ratio of 17-to-1 is the second worst. While the three organizations with the highest debt ratio -- Boyd, Penn, and Caesars -- are all heavily concentrated in the U.S., the two with the lowest ratios -- Sands and MGM -- have opened operations overseas, where gaming is booming.
Perhaps this is why Caesars wants to move into the Asian market. The company plans to build 25 casinos in Asia during the next five years. First I wondered: Who is going to be crazy enough to lend Caesars more money for these properties? But then I remembered: This company is based in Las Vegas, which has the highest foreclosure rates in the country. The town had plenty of insane lenders just a few years ago; perhaps Caesars knows a few who still are.
The Roman Colosseum would have been a great place to watch a show, as long as you were sitting in the grandstand. The mob decided who lived and who died by giving thumbs-up or -down. I am making an early thumbs-down for Caesars Entertainment on my CAPS page before the battle even begins. Follow the fight as it develops by adding this stock to your watch list.
- Add Caesars Entertainment to My Watchlist.
But since I have given you a strong agreement for a sell, now I'll give you a strong argument for a buy. Check out this article on a company analysts believe will be the next rule-breaking multibagger.
At the time this article was published Fool contributor Matt Thalman owns shares of MGM, but has no positions in any of the other companies mentioned above, nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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