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The good news:  we calculate positive equity value.  The bad news:  just barely and that’s the top end of our valuation range!

Caesars is once again trying to go public after a failed attempt to sell investors a bag of coal in late 2010.  The story is definitely better but we struggle to get to positive equity value.  Our valuation range per share is -$7 to +$3.  Why the big range?  Why not?  There are so many deltas, discount rates, and projects on the come.  Our point estimate is -$2 so use that if you’re uncomfortable with the big range.  The takeaway is that we can’t get to $8-10 per share.

Their pitch this time around is somewhat similar (but a little more developed) than the last go around, with a few exceptions:

  1. They have a public comp in what IGT paid (or massively overpaid) for Double Down and would like investors to give their Playtika business comparable value at $500MM
  2. Online poker in the US is looking like more of a reality with timing and scope still unclear, though.  We think it’s fair to assume IF online poker gets legalized at the federal level, then we could have a $1BN EBITDA pie a few years out where CZR gets 20%.
  3. Their Ohio casino JVs (Horseshoe Cleveland, Horseshoe Cincinnati) are going to open in 2012 and 2013, respectively, and they have an option of getting slots at Thistledown but that’s further away
  4. Vegas is better; regionals are still ‘stable’; Atlantic City is still bad
  5. Maryland has a good chance of happening
  6. Massachusetts could happen but it would just be a management contract so we’re not sure that moves the needle
  7. Pennsylvania is dead and no mention of Texas

What hasn’t changed?

  • Maybe it’s no longer a bag of coal, but it’s not much better than a bag of lemons
  • There is still a lot of deferred maintenance capex
  • Leverage is about 12x 2011 and unlikely to go down by much in the foreseeable future

What’s strange?

  • That CZR is selling you a recovery story in early February with no year-end financial disclosure
  • The small size of the deal

What about the term loan amend and extend?

  • CZR is trying to extend up to $4BN on its B1-B3 Term Loan due in 2015 to 2018
  • In exchange for the extension, CZR will pay an incremental 150bps on the extended piece which would cost $60MM if they get the full $4BN extension
  • For those lenders who opt to extend, 25% of their debt would be paid down with proceeds from a Senior Secured bond offering which would likely price around 8.5% and cost another incremental $30MM of interest if the full $4BN extension happens
  • We don’t think that most lenders will opt to extend since CZR is still burning cash and that would move them to the back of bus behind other lenders

Valuation

Our point estimate for valuation is -$2 per share.  Yes, that’s negative equity value.  We tried very hard but cannot get above $3 per share at the high end.  Here is the calculation:

CZR: IF AT FIRST YOU DON’T SUCCEED - czr3