Rolling the Dice on Caesars: A $30 Billion Gamble That Failed
In 2008, a partnership of private equity (PE) firms, Apollo Global Management and TPG Capital, decided to roll the dice on the iconic Caesars Entertainment. They paid $27 billion for the acquisition and saddled Caesars with $20 billion of debt. Just six years later, in 2015, Caesars couldn’t bear the weight anymore and filed for Chapter 11 bankruptcy protection. The deal was ultimately a losing proposition for the investing firms, as Caesars went bust with $30 billion in debt, making it the largest casino bankruptcy in history.
The High-Stakes Bet that Went South
Before the acquisition, Caesars wasn’t doing so badly. But the PE duo dreamed of a jackpot. They hoped to create an unrivaled global leader in gaming and hospitality. The timing was less than perfect—shortly after the acquisition, the global financial crisis hit, causing enormous disruption in the casino and hospitality sectors. Still, the firm’s fortunes didn’t fail because they had bad luck—it failed because of the gargantuan debt and a misjudged strategy.
The PE firms executed a typical financial play—using leverage (borrowed funds) to finance the acquisition. They betted on high short-term growth and increasing cash flows that would be used to service the outstanding debt. But they overstretched it when they failed to anticipate the recession. As the economy tanked, so did the casino industry.
A Game of Financial Engineering
Apollo and TPG tried to resolve the issue using a controversial method called OpCo/PropCo split. This is a financial engineering maneuver in which a company’s operational assets (OpCo) are separated from its property assets (PropCo). The OpCo usually leases the properties from PropCo, helping to create a stable revenue source and potentially providing some tax benefits. It was essentially a desperate attempt to salvage their investment.
The OpCo/PropCo split met with fierce resistance. Creditors accused the PE firms of asset stripping—moving the most profitable assets to a separate entity that was safe from creditors, leaving the indebted and less viable OpCo to bankruptcy.
Bankruptcy and the Fallout
The legal and public relations fallout was disastrous, and in 2015, the indebted Caesars unit filed for bankruptcy. A court-ordered examiner found that Apollo and TPG-led Caesars had moved assets while leaving behind $18 billion in liabilities—confirming the creditors’ worst fears.
The fallout cost substantial legal charges, laid-off workers, and a tarnished reputation. Apollo and TPG avoided the worst-case scenario of a full company liquidation but were forced to cede much of their equity stake and relinquish operating control.
Lessons from the House that Busted
The Caesars fiasco addresses a fundamental flaw in high debt-laden private equity deals—a wager on perpetual growth while discounting the cyclical nature of businesses. Couple this with questionable financial engineering, and it’s a recipe for a collapse.
Addressing PE’s role, the saga casts a shadow on the sophistry accompanying leveraged buyouts and aggressive financial restructuring. It’s a stark reminder of how financial engineering, devoid of sound operational strategy, can lead to disaster. The house doesn’t always win, and when it loses, it loses big. Instead of betting on the roulette, PE firms might do better to understand and manage the risks they’re taking.