Caesar’s Entertainment (CZR) has enjoyed a massive 64% run up since February 6th on the likelihood that New Jersey will pass legislation allowing for interactive gaming on the internet. Should the law go into effect, bondholders would prefer to see CZR spin off its interactive division into a new unit. While that’s fine and dandy for those holding company debt, CZR’s stock would probably not see a boost in price if the legislation passed as we believe that the 64% run up is not entirely justified by this news. Tax issues would come into play and though Caesar's would be able to monetize the new interactive unit, it would not be a boon for stockholders.
We think that the market is over-valuing the size and profitability of a legal NJ online gaming market. Nevada legalized online gaming back in June 2011 and we have yet to see any impact. Same goes with Delaware. New Jersey has a larger population but it would still need to pool with other States to accumulate enough liquidity. Legal hurdles will prevent that from happening any time soon. More states will have to legalize gaming before any pooling becomes meaningful.