SYNTHETIC CZR

Investors may be better off creating their own CZR at only 10x EBITDA.

Over 14x 2011 EV/EBITDA seems exorbitant to us, bordering on highway robbery.  We decided to try and recreate CZR through public securities.  While not perfect, we think a combination of BYD, MGM, PENN, and short a little Wynn Macau reasonably replicates the CZR portfolio.  By our math, we can do this at a 10x EV/EBITDA multiple, a 30% discount to the 14x implied by the midpoint of the CZR $15-17 offering range.

The CZR bulls will say that you can’t recreate the Harrah’s Total Rewards system and there is brand equity with World Series of Poker.  However, PENN has huge growth in Ohio which isn’t reflected in its 2011 valuation. Moreover, BYD has significant land holdings on the Strip which do not currently contribute to EBITDA. Finally, MGM has international brand development and management opportunities, again not included in its EV/EBITDA valuation.

Let’s not forget CZR’s industry leading leverage of 11.5x.  While MGM is in the ballpark, BYD is “only” at 6x leverage and PENN maintains just 3.5x leverage.  Is Gary Loveman, Total Rewards, and the hope of near-term internet gaming enough to justify a 4x EBITDA turn valuation differential?  We would argue definitively no.