Caesars Entertainment Corporation just sold Playtika Ltd., a section of Caesars Interactive Entertainment to a consortium of Chinese equity funds for $4.4 billion. Did Caesars just save itself? For the first time since it officially split into two and dumped all of its bad debt in a garbage shell in a financial sleight of hand, the answer is a definite maybe. That’s a big improvement over absolutely not, so maybe we’re finally getting somewhere.
Before we go into the details of what just happened, let’s just point out one unsavory aspect of any potential agreement between junior bondholders and Caesars. That is, it won’t be based on any natural notion of actual justice. If Caesars is to be saved, it will be saved by screwing over 49.9% of its junior creditors. In order for the United States “justice” system to preserve the company’s existence, Caesars has to secure agreement from 50.1% of junior creditors. So far, they have 37%, so they’re close. The total owed is $5.2 billion and Caesars is contributing $4 billion in a mix of cash, new debt, and equity. With the sale of Playtika, that number can now go higher, but don’t trust Caesars to pay off every penny even if they can. That would be the honorable thing to do. What they will instead do is keep whatever money they can and only pay off as much as is required to get that 50.1% so they can keep treading water.
What would real justice be, rather than public State justice codified by politicians under the influence of financial lobbyists? It would be to pay off 100% of all money owed to anyone holding any debt that is due, and if any single person cannot be paid off, any existing capital should be immediately liquidated to pay it. This is in effect what Caesars has done, partially, by selling Playtika. Paying off only 50.1% is essentially a 50% bailout by the government to Caesars. There is no difference between that and that TARP 2008 bailout of banks or any other bailout.
Now about Playtika, once again Israel is popping up as a gaming powerhouse. Playtika is a mobile gaming app company that uses virtual currency and in-app purchases to make money, much like King Digital Entertainment or Zynga, or Nintendo’s Pokemon Go. The main difference between Playtika and Pokemon Go is that Playtika players are not induced to walk into graveyards or off cliffs to their deaths while playing the game. This is a good thing. (For decades since the 1980’s, game developers have been trying to figure out how to combine exercise with gaming, and suddenly they have gone too far in one giant leap…off a cliff.)
Playtika is by far the largest part of Caesars Interactive Entertainment, which contributed $766 million to Caesars’ top line in 2015, or 16% of its $4.65B. According to the Wall Street Journal, $725M of that revenue is from Playtika, so Caesars has essentially gutted that segment if the WSJ is correct. It looks for now that this was Caesars’ only option given that the bankruptcy judge in charge of its case was heavily hinting at striking down Caesars’ financial restructuring if a deal wasn’t cut soon.
A good move, maybe, but it presents a Catch 22. According to the deal signed with 37% of creditors already, bondholders on board with the plan would get a mixture of new debt and equity. The fact that Caesars has agreed to sell Playtika, takes down the value of that equity so junior creditors will get hit from that direction instead. It is less direct and a higher chance of being recouped, but it is still a hit.
The silver lining in all this is that much like the huge success of World Series of Poker, itself a division of CIE, Playtika has been an enormous success for Caesars. They bought it for about $100 million in 2011, and are now selling it for $4.4 billion for a gain of 44x in 5 years. It’s amazing how a company can dig a hole so deep but at the same time have such great investment acumen. It’s such a success at this point that one of Playtika’s games, Slotomania, is now the 7th highest grossing game in the Apple App Store. The fact that moves like this have already been made provides some hope for Caesars that its next moves with whatever resources it has left after all this is settled, may be able to bring it back into prominence once again. It’s a long uphill battle, but it does at least seem somewhat possible now, if still unlikely.
As for the other side of this deal in China, Playtika looks safe for now. The foreseeable danger though is that Beijing could crack down on Playtika’s business in China even though it is for virtual currency on the grounds that it breaks some licensing law or whatnot, or if Macau complains that people playing virtual games on their phones in China upsets Macau’s monopoly on the gaming industry in the region. There is also a chance that virtual currency could eventually bleed into real money on the black market. One of Playtika’s revenue streams is selling virtual currency on the system to gamers. If someone can figure out a way to trade virtual Playtika currency for real money at a discount through some kind of workaround app, then you would effectively have real money games in a sort of oblique structure and Caesars would have little incentive to stop it as it would increase their customer base more than it would eat into profits, probably.
Never underestimate a communist-in-name country under economic stress. They are bound to do anything. Last week, the New York Times reported that the ruling Communist party is cracking down on independent internet news in an effort to block any information that isn’t filtered through the Communist propaganda machine. In a move back towards Maoism, it’s a sign that there is more political stress in the People’s Republic (neither a republic nor for the people) probably caused by economic hardship, more than what is being reported. Independent news is not generally supportive of the establishment, and Beijing could easily take its frustrations out on Alibaba’s Jack Ma and his Playtika consortium, though we shall see.
