Caesars’ stock performance
On November 11, 2014, Bloomberg news reported that Caesars Entertainment Corporation (CZR) reached an agreement with senior creditors on a new debt restructuring plan. The plan includes the pre-arranged bankruptcy of its largest operating unit, Caesars Entertainment Operating Company (or CEOC), in mid-January 2015. CZR’s share price surged over 45% over a two-day period ending on November 13, 2014. The average volume traded during those two days was ~7.5 million shares.
The above chart shows CZR’s trading performance over the last year. Over a one-week period ending November 14, 2014, CZR stock returned 36.4%. In the one-month period ending the same date, CZR stock returned 64.3%. The average volume traded over the week stood at 4.4 million shares.
In November 2012, Penn National Gaming, Inc. (PENN) surged by 28% immediately after it announced a restructuring plan to spin off its real property assets division. Both CZR and PENN are part of the Consumer Discretionary Select Sector SPDR Fund (XLY) and the VanEck Vectors Gaming ETF (BJK).
CEOC is burdened by a massive $18.4 billion in debt, which was created when CZR was acquired in 2008 by TPG Capital and Apollo Global Management LLC (APO) in a leveraged buyout deal valued at $30.7 billion.
Why the stock surged
CEOC contributes ~56% to CZR’s consolidated property EBITDA, but over 70% of CZR’s total consolidated debt is attributed to CEOC. This means that CZR’s is incurring huge interest expenses from CEOC, which erodes its profitability at the shareholder level. This is why offloading the unit could serve as a boon to CZR’s profits after interest expenses, and possibly boost its earnings per share.
The market reaction may have been caused by the perception of what CZR’s share price could be, based on its standalone capacity, after it becomes detached from its highly leveraged unit, CEOC.
The high volume traded at increasing prices in the week ending November 14, 2014, indicates that buyers were willing to revise their bid price upward to match the ask price charged by the sellers. It also indicates that sellers got the opportunity to book their profits.