Harrah's Entertainment (CZR) IPO Could Be A Good Capital Structure Arb

Besides the fact that the Harrah's Entertainment (CZR) IPO probably represents a top-tick for "gaming" aka casinos, it could also be a good capital structure arb. According to an article about the CZR IPO in this weekend's Barron's, the private equity fund owners are seeking to sell 9% of the company for $500 million:

Assuming the offering is completed, shareholders will own 9% of the company. Hedge funds controlled by billionaire investor John Paulson will own another 9%, and the private-equity sponsors will hold 81%. 

That implies a value for the equity of $5.5 billion, plus the $22 billion in debt gives an enterprise value of $27.5 billion. That is a pretty rich multiple of the company's current anemic cash flows.

Since they are seeking to sell so little of the company, it might not represent a top-tick. The current owners may be hoping that the tiny public float becomes a must-own stock (getting swept up in the casino investing mania), which would allow them to mark up the stakes that their funds own. On the other hand, if they really believed in casinos, you would think they would wait until operating results improved before doing the IPO.

Harrah's public debt like the 10s of 2018, trades for 90 cents on the dollar and yields 12%. My capital structure arbitrage notion would be to buy the debt and short the common shares, assuming the IPO goes through.

As Barron's notes, Harrah's may need "a financial restructuring to make it a more viable company." That would involve a debt-for-equity exchange, or series of exchanges, which would continually weigh on the stock price. Meanwhile, you could collect the coupons.