Caesars Open to Digital Spinoff, But Prefers Full Ownership

Posted on: November 3, 2022, 03:40h. 

Last updated on: November 10, 2022, 02:33h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Caesars Entertainment (NASDAQ:CZR) is open to the idea of spinning off its digital gaming unit if that corporate action would unlock shareholder value. But the casino operator’s preference is to retain full ownership of that fast-growing subsidiary.

Caesars spin-off
Caesars CEO Tom Reeg. He said the company could spin off its sports betting arm but prefers to keep it in-house. (Image: Bloomberg)

On the company’s third-quarter earnings conference call earlier this week, Stifel analyst Steven  Wieczynski asked Caesars CEO Tom Reeg if the company would mull separating the digital arm. That includes Caesars Sportsbook in the future, noting, “There’s probably a lot of value here with the business being tied so closely to the brick-and-mortar side.”

I’d say that our competitive advantage here is tying it to the existing brick-and-mortar business and our Caesars Rewards database. And it would be my preference that that remains 100% owned by the parent company,” responded Reeg.

Caesars’ digital operations, including internet casinos, lost just $38 million in the September quarter as revenue surged 120%. That’s compared with a year-earlier loss of $164 million. Expectations are in place for the operators’ interactive business to turn profitable in months.

Caesars Digital Spinoff Won’t Come Lightly

Companies often spin off lagging businesses or units that no longer fit with their broader portfolios to create shareholder value. In many instances, that decision comes from pressure from an activist investor.

Additionally, there’s an element of market timing involved in spin-offs. The parent company usually doesn’t want to separate the unit when market conditions aren’t favorable. For much of this year, the S&P 500 has been mired in a bear market, while pure playing iGaming/sports wagering stocks such as DraftKings (NASDAQ:DKNG) and Rush Street Interactive (NYSE:RSI) are performing worse than broader equity benchmarks.

Currently, market conditions aren’t conducive to spin-offs, and an investor isn’t pressuring Caesars to shed its interactive unit. Reeg is open to it, but it’s not a top priority at the moment.

“If you get to different shareholder bases for the two businesses, there’s a complexity introduced that you see in — you can see that in some of our peers in terms of when you get to different shareholder bases in the same business,” he said on the call. “But I’d tell you, you know that we’re constantly focused on how do we drive shareholder value. If you get into a market where that ultimately makes sense, and that’s the way to increase the pie for shareholders in total.”

Why Caesars Might Reconsider

One reason Caesars could potentially revisit the idea of spinning off its internet casino/online sportsbook business is a move to reduce debt. However, the company is halting its Las Vegas Strip asset sale plans, and it was able to pare liabilities by $400 million in the third quarter.

On the other hand, not retaining full ownership of the online unit comes with risks. Notably, iGaming is a highly profitable, low-margin endeavor, and with more states possibly entering that fray, operators likely want full control of their internet units. For now, it’s an easy call for Caesars.

“Certainly, that’s something we would consider. In the recent market environment, there hasn’t been much value placed on digital assets. So, it’s a very easy decision as we sit here today,” noted Reeg.