How does a $31 bln mega-LBO become an $18 mln IPO?

February 7, 2012

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

How does a $31 billion mega-buyout dwindle to an $18 million initial public offering? What sounds like a gambling tragedy is the perplexing, yet true, story of the leveraged buyout of Caesars Entertainment – formerly Harrah’s Entertainment – by TPG and Apollo. Co-investors are in such a hurry to get out, they’re actually paying to exit.

The 2006 LBO, combined with a boom in Las Vegas casino construction, left Caesars too heavily indebted when tourism turned down. Swapping some debt for equity helped, but the company still has $18.5 billion in net debt. It had $1.8 billion in EBITDA over the past 12 months, only roughly equal to its interest expense. That makes it hard to spruce up casinos or build new ones.

Selling $1.25 billion of long-dated debt in conjunction with the IPO will give the company some breathing room to await the return of the gambling masses. The possible legalization of some kinds of online gambling in the United States might also help increase revenue. Paying off a big chunk of debt would be a more certain fix.

That, however, requires cash, and the firm found few takers at a price it would accept when it tried to hawk $500 million of stock in late 2010. Its current IPO plans involve selling a miniscule 1.4 percent of itself. The proceeds won’t even be enough, after fees, to cover Chief Executive Gary Loveman’s pay package. Then again, the house can’t really complain. Investors gave Caesars the shares it is selling as a quid pro quo for agreeing to float.

While lead investors TPG and Apollo aren’t offloading stock, the IPO does allow co-investors holding 18 percent of the company to dump their stock – half immediately following the float, the rest after six months. John Paulson’s eponymous hedge fund firm, which participated in the debt-for-equity swap, will also be eligible to sell its 9.9 percent stake.

It’s understandable that investors might want to cash in their remaining chips. At the top of the IPO price range, the company will have an enterprise value of about $20 billion. Considering that’s only two-thirds of the LBO price back in 2006, owners of shares are lucky to have the chance to get out with much of anything in their pockets.

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