Caesars IPO Inflates the Casino Bubble
Gaming mega-giant Caesars (NASDAQ: CZR) has joined competitors Sands (NYSE: LVS) and Wynn (NASDAQ: WYNN) on the stock market, with an IPO of $9 a share. Interest in the company exploded, with over 1.85 million shares trading and the stock price climbing to nearly $14 after the offering. Shares have fallen slightly, but are trading at a healthy premium around $13 per share.
The company has held out on going public for years, but a high debt load forced executives at the casino operator to follow through with an IPO, albeit hesitantly. The company will just be dipping its toes in the market, with 1.81 million shares expecting to raise $16.3 million, meaning that only 1.4% of the company is up for grabs.
Shortly after going public, the stock was halted after a sudden spike, despite analyst expectations that shares in the company are a bad bet.
Investors should consider carefully buying into a rally. Caesars' debt load has skyrocketed in recent years thanks to a miserable storm of bad luck and bad planning. Despite a continued downturn in the Las Vegas economy that is keeping MGM (NYSE: MGM) on the sidelines, the company is going through with plans to build The Linq, a pricey retail and entertainment complex that will cost over half a billion dollars to build. Designed after The Grove in Los Angeles and including an observation wheel similar to the London Eye. The new complex will involve a rebranding of hotel/casino Imperial Palace, which has operated as an Asian-themed property for over half a century.
While Caesars Senior Vice President Jan Jones bragged that The Linq would be a boon to the city, critics have said that it is more of the same and will not help Las Vegas recover from its recent doldrums. Caesars planners have also failed to convince the public that an outdoor shopping experience will be particularly popular in a desert town that sees temperatures exceeding 100 degrees F (37 Celsius) for half of the year.
Caesars has touted the observation wheel as an opportunity to enjoy a "memorable experience" of the Strip, but a boom in high rise buildings over the past decade has made it easy to get a panorama of the city's casinos. The Stratosphere, a cheap copy of the Seattle Space Needle, has offered free entrance to its Level 107 Lounge and Top of the World restaurant. For tourists desperate to spend money, tickets to the observation deck a couple stories above the lounge are available for $16 (kids get in for $10).
Caesars is touting the new property as a jobs maker, with 1,500 "permanent" jobs offered at the property. Gary Miller said that "the money is in the bank" for the property, apparently seeing little irony in the statement emanating from a company over $20 billion in the hole. Since Nevada is an at will state, it's difficult to see just how permanent those positions will be. In any case, with Las Vegas' unemployment still climbing far above the national average, it is difficult to see how the 1,500 jobs in The Linq will make much of an impact to a city that lost 5,000 jobs in December 2011, dropping the unemployment rate to 12.7%.
The city also has more homeless per capita than almost every other city in the country. One out of every 200 people in Las Vegas is homeless. That is over double the national average. Only Tampa, New Orleans, and Fresno have more people living on the streets.
With $20 billion in debts and lackluster plans for the future, Las Vegas would be unwise to put its bets on Caesars to improve the city's prospects. Investors might also want to be cautious.
Other casino conglomerates have found better ways to maintain profitability. Las Vegas Sands has bet heavily on Macau, a move that recently yielded record earnings. MGM's focus on cost containment has helped its margins near profitability, with operating margins at 5.04% for Q3 2011, although the stock was recently downgraded by Goldman Sachs as Las Vegas continues to flounder.
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