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Can Caesars Entertainment rebound from bankruptcy?




Caesars Entertainment made some poor decisions and bad moves under Gary Loveman but a new CEO should help bring them out of bankruptcy.

When Gary Loveman announced that he was stepping down as CEO of Caesars Entertainment it was no surprise. While Loveman did a commendable job at making Caesars the industry leader, the financial situation of Caesars today mandated that someone high up had to pay the price and unfortunately for Loveman it was him. For those unfamiliar with Caesar's history and Gary Loveman's career, a brief history is in order.

Loveman joined Caesars (then operating as Harrah's) in 1999 as Chief Operating Officer after teaching at Harvard for almost 10 years and eventually became CEO of Caesars Entertainment. One of his main achievements during the time as COO was the introduction of the Total Rewards program which allowed customers to earn points that they could redeem for cash or rewards. The rewards program was available at all Caesars properties so a person playing at Caesar's Palace, Harrah's New Jersey or Casino Windsor could use the same card to gain points and rewards. Other casino Gary Loveman head of Caesarscompanies soon followed Caesars' lead and introduced rewards cards of their own. The cards were deemed a win-win for players and the casinos since it allowed customers to earn rewards while at the same time it allowed the casinos to keep track of play as well as getting to know the customer better. While most people loved it others still preferred the old method of being monitored by pit bosses and getting comps like hotel rooms and show tickets as a result of immediate play. With the rewards card, play monitoring is computerized and the real play over time is assessed so consequently many players believe they are getting "less love" than previously. One shocking revelation to Caesars and others which was found out from the cards was that slot play provided much more revenue to the casino than high rollers. As a result the use of hosts to cater to whales has been cut down dramatically everywhere.

Eventually Loveman became CEO and during that time he almost quadrupled the amount of casinos that Harrah's operated. One area he did not venture into, however, was Asia and Loveman admitted that was one of his pivotal mistakes. Loveman wanted to grow the company in North America but the North American market was becoming saturated while Macau was growing in leaps and bounds. Thus, while Caesars spun its wheels in the last few years in the USA, companies like Sands, MGM and Wynn which set up Macau casinos were making money hand over foot from Chinese customers venturing to the legal gambling protectorate.

In 2008 Harrah's moved from a public company to a private entity after the purchase by Apollo Global Management and TPG Capita for $30 billion. But 2008 was the start of the financial crisis and contrary to common belief the casino industry isn't recession proof, people lost their jobs and their homes and one of the first luxuries they seemed to cut was gambling. Trips to Las Vegas and Atlantic City plummeted and so too did casino wagering. Even those who did venture to the gambling meccas tended to bet less than before. As a result losses piled up. So, in attempt to attract more capital, Harrah's tried to take the company public again issuing an IPO under the name Caesars Entertainment Corporation in 2010 for $531 million but after little interest they rescinded the IPO. In 2012 Caesars again issued an IPO at a much lower price and raised about $16 million. Despite those efforts it was clear that Caesars wasn't going to get out of debt any time soon, so late last year, faced with pending bankruptcy, the 2 main owners, Apollo Global Management and TPG indicated that they wanted to undertake an $18.4 billion restructuring deal that would place Caesars Entertainment into bankruptcy and convert it into a real estate trust. Under this scenario Caesar's debt would be cut by $10 billion and make it more manageable. Junior creditors, however, led by Appaloosa Investment LP and hedge funds linked to Oaktree Capital and Tennenbaum Capital objected strongly and asked a judge in Delaware to investigate claims that insiders plundered the unit by paying themselves hundreds of millions of dollars and moving assets out of reach of the junior creditors. Consequently they wanted the proposed restructuring to be quashed.

"These insider transactions stripped the debtor of most of its valuable income-generating assets and hundreds of millions of dollars of cash, leaving the debtor burdened with massive debt that cannot be repaid," the junior creditors said in court papers.

There is also some confusion regarding credit default swaps which could add to Caesars debt once bankruptcy proceedings are completed.
As a result of the confusion and frustration, shareholders and creditors were calling for Loveman's head, so Loveman announced he would step down as CEO but remain as chairman. He will be replaced at CEO by Mark Frissora who oversaw Hertz for years. Frissora, however, does not come to Caesars without baggage as he left Hertz under a cloud of suspicion. Nevertheless he was successful in consolidating the car rental industry with the purchase of Dollar and Thrifty and growing the business by over 200%.

There's no question that some of Caesars troubles were through no fault of their own, i.e. the economic downturn and the lack of interest in Atlantic City in recent years, but some decisions were also clearly errors. Loveman admitted that not expanding to Macau in 2006 when given the opportunity was his biggest mistake, but there were some other mistakes as well. For example, when legal online gambling was first being discussed, Caesars was at the forefront demanding a federal bill and saying they would oppose all state bills to legalize online gambling. The move may have made sense to them since they believed a federal bill would provide a larger, more uniform and liquid market, as well as a uniformity of laws, but this proved to be short sighted. Many industry analysts believe that had Caesars and MGM not pushed so hard for a federal bill then more states would have entered into online gambling at an earlier stage and the same result as a federal bill would have been realized. By law if something is legal in one state and legal in another state then it's legal between the states so there was nothing to stop states from banding together to increase the pools for slots and poker and surely they would have worked together to come up with rules that all states could agree to. However by pushing for a federal bill many states decided to stay on the sidelines so as not to upset the casino giants and the result has been the introduction of online gambling in only three states with very poor revenue. The decision also gave time for Sheldon Adelson to line his ducks in a row and enlist various legislators to try and ban online gambling. Had online gambling been introduced in numerous states at once, it is unlikely Adelson's efforts would have ever gotten off the ground.

One other mistake Caesars made was putting so much emphasis on online gambling in New Jersey. For some reason Caesars was convinced that their WSOP and Harrah's casino websites were going to be so popular that the lost revenue from Atlantic City would be made up by the websites. Of course that didn't happen. Revenue from New Jersey has been very poor mainly because the majority of visitors to Atlantic City come from outside of New Jersey and they can't play on those websites, plus studies have shown people don't view online gambling the same way they do a physical casino. One is considered a vice while the other is considered more of an outing or vacation. So the person looking to have some fun playing slots at the Tropicana in Atlantic City isn't necessarily the same person who will play slots online.

Caesars bankruptcySo that brings us to the question as to whether Caesars has a future. Many business websites have been warning that Caesars' future is bleak and some of the most well respected analysts are telling investors to sell now and take what they can. But it seems that those analysts are unfamiliar with the ebbs and flows of the casino industry and it is my belief that Caesars does have a future to be profitable again. But . . . only if several events occur.
First, Caesars has to lower their debt. They certainly can't function if they are paying interest on their current debt load so they have to reduce it somehow. It's unlikely the courts will allow the proposed restructuring as it stands so they'll have to introduce a new plan that satisfies the junior creditors. What that plan is I'm not sure, but that's why they hired Frissora and will pay him the big bucks.

Second, Caesars has to somehow make an impression in Asia. There is no question that countries like Macau, the Philippines and Japan will be producing the most gambling revenue and at some point when the recession ends, the amount of gamblers there will skyrocket. How Caesars can do so with their debt load and the current moratorium on licenses is unsure, but again that's for Frissora to figure out. Most likely it will entail a partnership with an existing company in that region.

Third, Caesars has to abandon their plan to expand in small American markets since land based casino gambling stateside is more or less saturated. Love him or hate him one has to hand it to Sheldon Adelson for recognizing where his bread is buttered. While Adelson did little in the U.S. outside of Las Vegas he did expand The Sands to Macau and got the only foreign license in Singapore, a move that is now reaping huge dividends, particularly with Singapore's new law that will ban all online gambling forcing Singapore residents, along with residents from neighboring countries like Malaysia, to venture to the casinos to gamble. No doubt Adelson hired people who were adept at identifying where the next big land based casino markets lay. Ironically both The Sands and Caesars were forefront with a Toronto casino bid indicating there are still some useful markets in North America.

Fourth, Caesars has to push on with online gambling in the U.S. and determine innovative ways to attract interest from U.S. citizens. When online gambling first was introduced in the UK it started slowly but as residents got familiar with it they flocked to it. Caesars along with MGM and other casino companies will have to come up with a separate marketing plan for online gamblers than with land based casino patrons because the two entities are different. But most importantly they'll have to come out fighting against Adelson and the legislators that are trying to repeal online gambling and they need to push states to get in the game. If and when there are hundreds of thousands of online clients stateside there is no doubt the interest in online gambling will flourish and so too will profits. Unfortunately for Caesars they will have to do so without the AGA which recently announced they will no longer lobby for online gambling legalization and expansion.

Lastly, Caesars has to be at the forefront if and when sports betting is legalized. Throughout the world sports betting is still the main choice for bettors online and unlike at casinos it need not be a loser for the casino. With current technology and brain power the bookies have begun to gain an advantage over bettors so it can be a good money maker. More importantly once the sports bettor is enticed to the site to wager on sports they often will play some slots, blackjack or poker as well. Regardless, Caesars can't be left behind in this opportunity and must plan on how to be at the forefront when sports betting becomes mainstream in the U.S.

Caesars has a long road ahead but there's no question that they have the brand and the personnel to lead it out of this extended downturn. But if they are going to succeed they have to look at a new route at getting there. Hiring Frissora was a good start and keeping Loveman as a chairman to provide some long term knowledge will help too. Hopefully for U.S. gamblers Caesars will be around for a long time yet.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!