A Tiny Reno Casino Chain Borrowed Big to Swallow the Giant Caesars
The deal was engineered by Tom Reeg, a former junk-bond trader now running Caesars, with backing from Carl Icahn and the family behind Eldorado.
The Wall Street Skinny · The Financial Times' Go-To Reporter on All Things Private Equity & Private Credit TELLS ALLEldorado operated a small string of casinos in Reno, Nevada, when Carl Icahn, the activist investor, pushed it to buy Caesars, the Las Vegas giant fresh from bankruptcy.
Caesars had entered bankruptcy in 2015 after the 2008 leveraged buyout by Apollo and TPG loaded it with too much debt just before the economy collapsed. That led to a fight between the private equity owners and holders of $24 billion of debt. It emerged in 2017, with creditors holding most of the equity, after a tiny $20 million stock offering that Apollo arranged to list the shares.
That set up what Sujeet Indap, the Financial Times reporter, called "a massive deal for a very little company": how a very small chain bought a much larger one with borrowed money, in what he called a "financial engineering masterpiece."
Eldorado borrowed heavily to do the deal. Behind it were Tom Reeg, a former trader and investor in junk bonds, risky corporate loans that pay high interest, who knew gambling and is now chief executive of Caesars, and the Carano family, which had run Eldorado for decades.
Icahn is involved again, and his representatives sit on the board of Caesars.
The pattern may repeat. One possibility under discussion is a purchase by Tilman Fertitta, the Houston billionaire who owns Golden Nugget, a smaller, privately held rival, which would need heavy borrowing to buy Caesars and combine the two. The other is a straight management buyout involving Reeg, presumably the Caranos, and potentially Icahn, a pure leveraged buyout with no strategic buyer, at least that is known.
Either path raises the problem that sank Caesars before. The company has roughly $15 billion in bonds and loans outstanding. In a buyout, those would have to be cashed out or rolled over, and if they roll over, new debt would be layered on top or alongside them, lowering what the current bonds are worth. Indap said that happened to unsecured bonds in the first deal. Even if the deal gets done, he said, the company after the buyout would again carry a lot of debt, and while Caesars generates a lot of cash, too much leverage could bring back the problems of 2009, 2010, and 2011.
Questions people ask
How can a small company afford to buy a much bigger one?
In a leveraged buyout, the buyer puts up a relatively small amount of cash and borrows the rest, using the target company's own buildings and future profits as collateral. That lets a small company buy a much larger one, but leaves the combined company with large interest payments.
What is a junk-bond trader?
Junk bonds are loans to companies with shaky credit, also called high yield bonds because they pay high interest to compensate for the risk. A junk bond trader buys and sells that debt and studies how companies handle it.
Who is Fertitta and what is Golden Nugget?
Tilman Fertitta is a Houston billionaire whose businesses include restaurants and the Golden Nugget casinos. Golden Nugget is much smaller than Caesars and is privately held, so any purchase would rely on heavy borrowing and the promise of savings from combining the two.