Caesars Entertainment Corp. (CZR), weighed down by almost $20 billion in buyout debt, is opening its first casino in five years today under a growth strategy that relies on local partners for investment.
The largest operator of U.S. casinos, Caesars owns 20 percent of the $350 million Horseshoe Casino Cleveland and will receive fees for managing it on behalf of majority owner Rock Gaming LLC. Projects in Cincinnati, Baltimore and East Boston, Massachusetts take a similar course.
The approach is born of necessity. Caesars, the most leveraged big U.S. casino operator and the only one without a presence in fast-growing Asian markets, continues to repair its balance sheet. The company has total debt of $19.9 billion following its 2008 buyout by private equity firms Apollo Global Management LLC (APO) and TPG Capital LP, dwarfing its market capitalization of $1.81 billion.
“Investments that were made in 2008 in almost every industry have turned out to struggle a bit in the years that followed,” Chairman and Chief Executive Officer Gary Loveman said on Bloomberg Television’s “Inside Track.” “Our job is to work our way back and we have a path forward.”
The Cleveland casino and another Caesars opening next year in Cincinnati with Rock Gaming, backed by Quicken Loans founder Dan Gilbert, may generate as much as $350 million in combined earnings before interest, taxes, deprecation and amortization, according to Dennis Forst, an analyst with KeyBanc Capital Markets Inc.
“Cleveland is going to be a home run,” Forst said. “It certainly is better than not growing.”
Caesars has little room to sink money into projects. Total debt is 9.7 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Las Vegas Sands Corp. (LVS) has a leverage ratio of 2.8, Wynn Resorts Ltd. (WYNN) 2.1 and MGM Resorts International (MGM) 9.1, the data show.
The Las Vegas-based company, formerly Harrah’s Entertainment, was acquired by the private equity firms for $30.7 billion as casino stocks peaked, Loveman said. The investors put in $6 billion, according to a regulatory filing, and sold a limited number of shares to the public in February.
Caesars fell 4.7 percent to $13.75 at the close in New York. The stock had climbed 53 percent since going public at $9 a share on Feb. 7. In that time, competitor Wynn is down 4.1 percent, Las Vegas Sands has lost 3.4 percent and MGM Resorts has declined 20 percent.
Last year, Caesars lost $687.6 million on revenue of $8.83 billion, according to its annual report. While Caesars has extended maturities and bought back debt at a discount, it is the only casino-industry company among 16 tracked by Bloomberg that doesn’t generate enough Ebitda to cover interest expense.
The asset-light expansion strategy, similar to the way hotel companies expand by franchising, may be emulated by other gambling firms, according to Michael Paladino, a debt analyst with Fitch Ratings.
“There is a long-term trend to increase the branding of the industry and develop the fee-based part of business,” Paladino said. “This is in the embryonic stages.”
On May 7, Caesars announced the sale of its Harrah’s St. Louis casino to Wyomissing, Pennsylvania-based Penn National Gaming Inc. (PENN) for $610 million. The company will use the proceeds for its share of new casinos and its online gaming business, Loveman said.
In addition to the Ohio properties, Caesars is pursuing a casino license in Baltimore with Rock Gaming. The company is also seeking a license in East Boston, Massachusetts, with horse track operator Suffolk Downs, controlled by developer Richard Fields and catering business owner Joe O’Donnell. The company is also building a shopping mall and Ferris wheel attraction in Las Vegas.
Gilbert, majority owner of the Cleveland Cavaliers basketball team, co-sponsored the 2009 ballot measure that legalized casino gambling in Ohio. The Detroit native is investing hundreds of millions of dollars to spark downtown revivals in Cleveland, Cincinnati and his hometown, according to Matthew Cullen, a former General Motors Co. (GM) real estate executive who serves as president of Rock Gaming.
The Cleveland project involved renovating the historic Higbee department store. It will include pedestrian-friendly features such as windows to the outside, an easily accessible entrance, and later, street-level restaurants, Cullen said.
It is modeled after Harrah’s New Orleans, which after disappointing results and bankruptcy built an adjacent hotel, added outdoor restaurants and closed off a street, Cullen said. Based on that property, he said, “We identified them as a partner.”
Gilbert’s group bought a $60.8 million stake in Caesars’ online gambling business in April and separately acquired an interest in Turfway Park, a horse track in Florence, Kentucky, co-owned by Caesars.
The Cleveland project allows Caesars to take part in the city’s renaissance, Loveman said. He said the company will make use of its loyalty programs targeting hundreds of thousands of Ohio residents, and gain the expertise of a local developer.
“I think having a partner on the capital side of these businesses makes sense,” Loveman said in the interview. “We have to grow our way out of this. The business cannot de-lever simply by paying down enough debt over time. We can’t shrink our way to a better balance sheet.”
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