How Much Are a Casino’s Customers Worth?

Caesars is said to have a database of over 35 million people. That database is the result of years of mergers, acquisitions and aggressive marketing efforts. The company always touts the database as the major source of its casino revenues. Some of the Caesars bondholders would like to know how much those 35 million customers are worth on the open market. They think it is time to monetize those customers.

Hedge fund mogul David Tepper has a new bargaining chip in his high-stakes battle over troubled casino giant Caesars Entertainment. A group of bondholders, including Tepper, are pushing back against Caesars’ efforts to transfer control of its first-of-its-kind player loyalty rewards program to a separate entity. The chain’s private-equity owners, led by Leon Black’s Apollo Global, are seeking approval from about a dozen state gaming commissions to make the move. Josh Kosman, New York Post, 8-15-14

It is not really surprising, in the battle to undo the debt of Caesars, no stone is being left unturned. Most of the machinations are complex financial maneuverings that escape me. However, the goal is easy enough to understand; Caesars needs to reduce its debt. The debt is monstrous, even after some restructuring and selling off some assets to a subsidiary, the debt is still $21 billion.

Caesars Entertainment Corp. (CZR), largest owner of casinos in the U.S., will sell four properties to an affiliate for $2.2 billion, freeing up cash as the company works to restructure $24.5 billion in debt. The deal provides Caesars with flexibility as it weighs further restructuring. Apollo Global Management LLC (APO) and TPG Capital acquired the company in a $30.7 billion buyout in 2008, just as the financial crisis gripped Las Vegas. Christopher Palmeri, Bloomberg, 3-3-14

The debt is the result of a highly leveraged private buyout six years ago. Caesars, nee Harrah’s, was the subject of a buyout in 2006 by two privately held equity companies, Apollo Global Management and Texas Pacific Group. At $15.05 billion, it was one of the largest leveraged buyouts in history. It took two long years to get all of the necessary approvals. Harrah’s was finally delisted on January 28th, 2008. The operating company, Harrah’s, assumed what was by that time $20 billion in debt. It was the last major debt financing for a long time and for good reasons.

October 2, 2006 – The Wall Street Journal reported that private-equity firms would buy Harrah’s Entertainment for $15.05 billion in one of the largest leveraged buyouts in history. A number of private-equity firms, including Texas Pacific Group and Apollo Global Management were involved in the talks. Following approval from the U.S. Securities and Exchange Commission (SEC), state gaming commissions and by shareholders, the stock was delisted on January 28, 2008 and the company was taken private by Hamlet Holdings. Wikipedia

Like the failed Revel Casino Hotel in Atlantic City, the timing of the buyout was terrible. Had the buyout occurred 10 years earlier, the company might have been profitable. But in 2008, the Great Recession was beginning and gaming revenue nationally was dropping dramatically. Harrah’s, now Caesars, was stuck with a mountain of debt without the cash flow to service the debt. The years since then have been ones of constant striving to reduce the debt and save money wherever possible. In the first year alone, Harrah’s cut its maintenance budget for its 30 plus properties nationwide from $500 million to $50 million. Many casino companies have cut expenses in the face of diminished income, but Caesars has taken a step rarely taken in gaming.

Besides cutting operating expenses in the usual way all businesses do, Caesars has taken a more radical step, closing a property completely. Recently, it closed a Tunica property and one in Atlantic City and there will probably be others in the near future. The underperforming properties in Northern Nevada are most certainly on its short list, but in Missouri, Louisiana and even Ohio, Caesars has too much exposure in weak markets. With the opportunity to expand in Maryland and New York, Caesars is likely to act like large retailers do and close its weaker properties as it opens new ones in better markets. It is in the running for a casino license in New York and just opened a Horseshoe in Baltimore, Maryland. The corporation is also taking a run at Japan and South Korea.

One of the reasons the company has too much exposure is due to Harrah’s strategy to have at least one casino in every available market. Caesars is a mixture of brands that Harrah’s acquired during its dramatic growth and expansion phase. Showboat, Horseshoe, World Series of Poker, Rio and Harvey’s are some of the brands the company purchased along the way. Part of their expansion strategy was to buy good databases; the larger a casino’s database was the more attractive the casino was to Harrah’s. The aggressive expansion of its customer database resulted in 35 million casino customers enrolled in its Total Rewards system. That is a big and important number by any standard.

As I said earlier, some of this is way over my head. But just how much is Total Rewards worth? How much will it reduce the debt of the parent company as a spin off? And even more important, what might happen to the Caesars operating company if Total Rewards ends up in the hands of a competitor? The company can survive without any Showboats or casinos in Reno, but could it survive if it did not have the Total Rewards program?

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