Description

I couldn't get tables or diagrams to paste so I uploaded a more complete file to Dropbox.

https://www.dropbox.com/s/y3fnprh46fpj9dl/CACQ.pdf

CACQ is a very compelling, misunderstood, special situation investment which offers ~10-50% upside (The write-up was started when there was more upside).

• Caesars Entertainment Corp, formerly Harrah ’s Entertainment, is the country’s largest regional gaming operator
• The company has a growing presence in the online gaming market through its Caesars Interactive Entertainment (CIE) subsidiary
  • CIE offers real money gaming in the UK, France and Italy, as well as social and mobile gaming through its Playtika brand which was acquired in December 2011
  • CIE owns the World Series of Poker brand which offers real money land based tournaments, and will be used to promote its online platform upon legalization in the US
• Caesars was taken private in January 2008 by a consortium led by TPG and Apollo for $31B ($6B of equity + $25B of debt)
  • In February 2012 the company did an IPO at $9.00 per share
• The company currently has 136M shares outstanding of which Apollo/TPG own 70%, and Paulson & Co own 10%
• CZR generates ~$2B in EBITDA annually but has over $23B of debt outstanding (10.1X Debt / EBITDA) and a market cap of ~$3B
• This high level of debt has led many investors to stay away from the equity
• Apollo and TPG have proposed to split the company into two pieces via a complex transaction:
  • Over levered but stable gaming company
  • High growth online gaming company with attractive prospects and a net cash position
• The high growth online gaming company offers a potentially very attractive investment opportunity

Recent Legalization of Online Gaming in NJ & NV Should Allow CACQ to Generate ~$200 million of Additional Revenue

• The US had gross gaming revenue of $37 Billion in 2012
• New Jersey had gaming  of $3 Billion in 2012
• CZR generated $1.4Billion of  gaming revenue  in NJ in 2012 (45% share)
• As of today online gaming is legal in NV (poker only), NJ and DE
• Analysts estimate  NV's online gaming should yield ~ $100 million annually ,NJ’s should generate ~$750 million
• Over time, I believe that additional states will also allow online gaming, creating a multi-billion dollar market
• Casinos will soon allow individuals to gamble on their smart phones and tablets

CACQ will own 42.4% of Caesars Growth Partners (“CGP”). The remainder will be owned by CZR.

Caesars Growth Partners (CGP) has a76% ownership interest in Caesar’s online gaming assets, which should generate annual revenues of ~$200 million to ~$800 million

CGP also has  Planet Hollywood LV and the Horseshoe Baltimore, two premier properties from Caesar’s portfolio

CGP is  a growth vehicle. As such it will start off with a net cash position and will focus on opportunities that will allow top line growth (new casinos in attractive markets)

Harrah’s has the  largest domestic gaming database in the US. Ability to leverage this  database  with online  gaming operations will be a significant asset

CZR has the right to repurchase shares in CACQ at $17 per share, capping the upside. 

I believe CACQ’s equity is worth at least $12.50 to $17.00 per share

Catalyst