Don't get too excited by Caesars

Caesars returns to the public markets with a whimper.

Four years after being taken private for $31 billion, casino operator Harrah's returned to the public markets this morning. Now it's called Caesars Entertainment Corp. (CZR), but it's still the same money-losing, debt-laden company that failed to go public in 2010.

The only reason Caesars managed to price this time around was that it lowered its expectations to comical bottoms. Its initial public offering raised just $16.3 million, by selling 1.81 million shares at $9 a piece. For context, Caesars  filed to raise $575 million in its prior IPO attempt. Today's deal is more akin to a pre-revenue biotech startup than a gaming behemoth that generates more than $6 billion each year from bachelor weekends and slot machine-addicted senior citizens.

Caesars shares had popped more than 50% as of this writing to $13.73 a piece, but that may be more reflective of very limited supply than significant demand. The company's revenue for the first nine months of 2011 was actually lower than for the first nine months of 2010 -- thanks to decreases in casino dollars (hotel room and food revenue was up). The net loss shrunk by 25%, but it's still more than $470 million. And then there's the debt load, which remained at around $19 billion.

The real test for Caesars is what happens when its private equity sponsors -- including Apollo Global Management (APO) and TPG Capital -- offer up more shares in upcoming months. From a company press release:

In addition to the shares to be sold by Caesars in this offering, shares held by certain existing investors representing approximately 27.8 percent of the Company's issued and outstanding capital stock have also been registered for resale, of which approximately 18.8 percent are now freely tradable, with the remainder becoming freely tradable 180 days after completion of the offering described above.

If all of those shares sold at $9 each, that would represent another $524 million -- meaning that the company would basically raise what it originally wanted back in 2010. Well, except that the proceeds would be going to shareholders instead of to the company (which could really use the money to pay down its debt).

But, again, why does anyone think there will be enough investor interest in those shares? If the buyside was legit, why not just sell them via IPO?

In fact, the sponsors even seem to imply that they aren't too optimistic. Apollo and TPG originally struck a deal whereby Caesars would have to pay around $30 million in annual management fees -- yes, the whole concept is a greedster travesty we'll revisit in some other post --  but that the deal could be terminated with a one-time, $195 million payout upon IPO.

But Apollo and TPG aren't requiring the termination. One could view this as a favor to Caesars, except that the annual fees will continue. If Apollo and TPG really wanted to help the company and grease their own skids, why not boost future earnings by letting Caesars keep $30 million extra per year and signal that you're planning to head out? My guess is that Apollo and TPG expect to be in this for the long haul, and not with just a speck over majority control.

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