Did Caesars Entertainment and PokerStars Have Serious Discussions of WSOP Sale?

The American Gaming Association (AGA) filed a brief this week to protest the potential licensing of the Rational Group, parent company of PokerStars, in the State of New Jersey.  PokerStars responded with an allegation that Caesars Entertainment, who appears to be the main company behind the complaint, offered to sell them the Rio and the World Series of Poker brand.

Caesars Entertainment has yet to respond to these allegations.  There could be a number of reasons for this.  They may feel that there is no reason to respond to this allegation publicly.  They may also want the AGA to fight their battle for them.  Whatever the reason, this is quite an interesting accusation for PokerStars to float publicly.

Rio Has Reportedly Been on the Market for Years

It is no secret that Caesars Entertainment would like to sell Rio for the right price.  It is the only property in Las Vegas that the company owns that is not on the Las Vegas Strip.

Rio has seen better days.  The resort was built in 1990 as a locals’ casino with oversized rooms that could be described as luxury in their day.  The property no longer meets the standards of what most people would consider to be a luxury hotel.

Caesars Entertainment’s Massive Debt Load

Harrah’s Entertainment, now known as Caesars Entertainment, bought the property in 1999.  A lot has changed within the company since then.  Most notably, the company is now $24 billion in debt.  Some of this debt was acquired when Harrah’s Entertainment went private in 2008, while some of this debt was created to finance the privatization of the company that again went public in 2012.  The company’s gross revenue barely covers the interest payments on their debt.

Rio’s Current Capacity Within Caesars

Rio serves one main purpose now.  The 160,000 square-foot convention center allows for affordable conferences on the property.  The hotel’s competitive rates also help draw potential conventioneers.  This is the same convention center that hosts the annual World Series of Poker.

While there is no public information about this, the World Series of Poker is likely to be the most profitable convention of the year at Rio.  At the very least, the series fills Rio’s convention center during a time that is typically slow for Las Vegas.  Not only this, but it sells hotel rooms at Rio and many other Caesars Entertainment properties.

The World Series of Poker also helps Caesars Entertainment generate mailing lists.  Any player that enters an event must provide a Total Rewards card with their buy-in that includes their personal information.  This is no accident.  Caesars is using this information for the day that they can offer online gambling to players on that list.  In the meantime, they can at least market their Las Vegas and regional casinos to those players.

WSOP not Wholly Owned by Caesars Entertainment

The World Series of Poker brand is synonymous with Caesars Entertainment, but it is actually owned by Caesars Interactive.  Caesars Entertainment does not own the interactive division in its entirety.  Rock Gaming, their partner in Ohio and Maryland, owns a portion of Caesars Interactive.

Back to the Reported WSOP Offer

This brings us back to the reported offer to sell of the World Series of Poker brand to PokerStars.

The World Series of Poker is not a wholly-owned subsidiary of Caesars Entertainment.  They could sell this without the consent of their partner Rock Gaming, but would they do this without a serious consultation with their partner in two developing states?

Caesars Entertainment selling their share of Caesars Interactive would have two different scenarios.  One would be selling just the portion that they own.  Rock Gaming purchased an undisclosed percentage of the company in 2012 for $60.8 million with an option to purchase more shares for $19.2 million.  This option does not appear to have been exercised at this time.  Since Caesars Interactive is a private company, there is no way to know what portion of the company the original purchase covered or what the current value is for the options not yet exercised.

Several scenarios could occur under a sale.  It depends on what the contract states.

Caesars Entertainment could have a controlling stake in the company.  If that is the case, they could force Rock Gaming to sell their shares in a takeover.  Rock Gaming could also hold their shares after a takeover and still maintain their Caesars Interactive and World Series of Poker stake.  They could also sell their current shares and hold their options.  Rock Gaming might consider the Rational Group and PokerStars to be a company that they do not wish to associate with and decide to dispose of their entire investment.

This presents another point.  The Rational Group and their subsidiary PokerStars might find it difficult to receive a Nevada gaming license.  Even if Caesars Entertainment pushed for this there may be other casino companies in Nevada that would object to the licensing of a company that once operated in the State without a license.

Today’s news that 888 was recommended for an interactive license might say otherwise, but a battle with other companies is certainly not out of the question.  888 can at least claim that they were never under indictment in the US.  There seems to be a separation of companies that left the US market post-UIGEA and ones that continued to accept US players.  The legality of this is debatable, but the perception is certainly there.

Caesars Entertainment’s Future Could Depend on Interactive Division

Many industry analysts have discussed a potential sale of the interactive unit to keep the company out of bankruptcy.  While Caesars Entertainment’s financial issues are well-known, even a $2 billion sale would not pay off 10% of the company’s debt.  Some analysts feel that the potential for online gambling in the US under the World Series of Poker brand is the only way the company can survive without a liquidation of assets.  The company has $3.6 billion in bonds that come due in 2015.  The company has been successful in kicking the can down the road in the past few years by refinancing debt, but another recession or catastrophic issue with a property could restrict the company’s ability to refinance debt.

Some have speculated that the company’s stock price could collapse if the interactive division is sold or brought public as a separate entity.  These analysts assume that this would be a precursor to a bankruptcy filing.  Fitch describes a potential spinoff of their the interactive unit as a “logical precursors to a restructuring”.  A restructuring is often done through a bankruptcy filing if creditors are unable to agree on new terms.

Is Caesars Entertainment willing to expose themselves to this scrutiny by investors if it is perceived that the only way out of their hole is through online gambling?

Rumors surrounding the sale of Rio have been floating around Las Vegas for years.  The company has been unable to unload the property.  It would make sense that Caesars may want to pair the World Series of Poker brand with this sale considering there are few other company properties that could host the annual event.  I believe that such a sale was discussed with Rational Group.  The only question in my mind is how serious the offer was.  Did Caesars ask for an unrealistic number, or was there an actual negotiation that broke down?

Caesars Entertainment has been silent for 48 hours after this allegation surfaced.  There could be any number of reasons for their silence.  Until we know for sure, all we can do is wonder what went on behind the scenes.