Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
A description of our risk factors can be found in “Part I, Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to those risk factors during the nine months ended September 30, 2020, except for the following additional risk factors related to the impact of COVID-19, the Merger and the recently announced William Hill acquisition.
The outbreak of COVID-19 has impacted our operations and caused an economic downturn, widespread unemployment and an adverse impact on consumer sentiment. Such negative impacts could continue for an extended period of time and may worsen.
On March 13, 2020, in response to the coronavirus public health emergency the U.S. government declared a national state of emergency. In an effort to help control the spread of COVID-19, public health officials imposed or recommended various measures, including social distancing, quarantine and stay-at-home or shelter-in-place directives, limitations on the size of gatherings, closures of work facilities, schools, public buildings and businesses, and cancellation of events, including sporting events, concerts, conferences and meetings. As a result of orders issued by governmental authorities in the states in which our properties are located, all of our properties were closed beginning on March 18, 2020. While our properties have reopened, our operations, financial results and cash flows have been affected by social distancing measures, including reduced gaming operations arising from the reconfiguration of our gaming floor, limitations on the number of customers present in our facilities, implementation of additional health and safety measures, restrictions on hotel, food and beverage outlets and limits on concerts, conventions or special events that would otherwise attract customers to our properties. We expect that our operations will continue to be impacted by such restrictions for the foreseeable future. In addition, our operations, financial results and cash flows would be further adversely affected by the implementation or extension of new or existing restrictions, including reinstatement of shelter-in-place requirements or additional restrictions on travel and business operations. The implementation of stay-at-home or additional social distancing and mitigation measures in response to COVID-19 or other public health emergencies could cause future closures of all or a portion of our properties, which would adversely affect operations, financial results and cash flows.
We may also face unforeseen liability or be subject to additional obligations as a result of the COVID-19 public health emergency, including as a result of claims alleging exposure to COVID-19 in connection with our operations or facilities or to the extent we are subject to a governmental enforcement action as a result of failing to comply with applicable health and safety regulations. COVID-19 has materially adversely affected the economy and financial markets of the United States and the world and has resulted in widespread unemployment in the United States. Consumer demand for casino hotel and racetrack properties such as ours is particularly sensitive to downturns in the economy, unemployment and the associated impact on discretionary spending on leisure activities which bring demand for casino hotel properties such as ours. Reduced customer demand could result in lower occupancy rates, reduced visitation and additional disruptions in our casino business. The extent of changes in customer demand resulting from the economic downturn, widespread unemployment, reduced consumer confidence and consumer fears on our properties cannot reasonably be determined, but the impact of such factors may be significant and protracted.
As a result of the foregoing, we cannot predict the ultimate scope, duration and impact of the COVID-19 public health emergency, but we expect that it will continue to have a material impact on our business, financial condition, liquidity, results of operations (including revenues and profitability) and stock price for an extended period of time. The impact of the COVID-19 public health emergency may also have the effect of exacerbating many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019.
We have undertaken aggressive actions to reduce costs and improve efficiencies to mitigate losses as a result of the COVID-19 public health emergency, which could negatively impact guest loyalty and our ability to attract and retain employees.
As a result of the previous closure of all of our properties and the continued uncertainty regarding the duration and severity of this public health emergency, we have taken steps to reduce operating costs and improve efficiencies, including furloughing approximately 90% our employees while our casinos were closed. Such steps, and further changes we may make in the future to reduce costs, may negatively impact guest loyalty or our ability to attract and retain employees, and our reputation may suffer as a result. While a significant number of our employees returned to work once our casinos reopened, our operations continue to be affected by COVID-19 and our full work force has not returned. If our furloughed employees do not return to work with us when the COVID-19 public health emergency subsides, including because they find new employment during the furlough, we may experience operational challenges that may impact our ability to resume operations in full. We may also face demands or requests from labor unions that represent our employees, whether in the course of our periodic renegotiation of our collective bargaining agreements or otherwise, for additional health and safety measures, compensation, healthcare benefits or other terms
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as a result of COVID-19 that could increase costs, and we could experience labor disputes or disruptions as we continue to implement our COVID-19 mitigation plans.
Our ability to remain in compliance with our covenants contained in the agreements governing our indebtedness and lease obligations, and our liquidity, may be negatively impacted by the COVID-19 public health emergency, measures implemented to curtail its spread, and changes in the economy, discretionary spending and consumer confidence.
Our casino operations are a primary source of income and operating cash flows which we rely upon to remain in compliance with covenants contained in the agreements governing our outstanding indebtedness and lease obligations. On September 25, 2020, we drew $900 million under one of our revolving credit facilities and, as a result, as of September 30, 2020, we had an aggregate of $900 million of borrowings outstanding under our credit facilities and $3.5 billion in outstanding principal amount of senior notes, $4.4 billion in outstanding principal amount of senior secured notes, $6.4 billion principal amount outstanding under our Term Loan B, $597 million principal amount outstanding of 5.00% Senior Convertible Notes due 2024 and $400 million in aggregate principal amount of outstanding mortgage debt. On September 28, 2020, the Company deposited $2.1 billion , which included the proceeds from the revolving credit facilities, into an escrow account. As of September 30, 2020, these funds in escrow were classified as restricted cash until certain regulatory approvals were received. While we were in compliance with the covenants under our lease obligations and the agreements governing our outstanding indebtedness as of September 30, 2020, our ability to remain in compliance with the quarterly maintenance covenants contained in such agreements would be negatively impacted by a prolonged period of closure of our properties or if the COVID-19 public health emergency, measures implemented to curtail its spread or changes in the economy, discretionary spending and consumer confidence have a protracted negative effect on our business. Failure to satisfy such quarterly maintenance covenants would require us to seek waivers or amendments of such covenants. If we are unable to obtain such waivers or amendments, our creditors and the lessor under some of our lease obligations would be entitled to exercise remedies under the documents governing such obligations, including acceleration of the outstanding principal amount of such indebtedness or termination of our lease arrangements. In addition, while we believe that our cash on hand will be sufficient to provide liquidity to meet our obligations during the period that our properties remain closed, a protracted period of closure of our casinos could impact our ability to make required payments under our outstanding indebtedness, lease obligations or other obligations. Our ability to raise additional financing may be restricted by the covenants and restrictions contained in the agreements governing our indebtedness and could be adversely affected by disruptions in the financing markets and changes to the economy caused by the COVID-19 public health emergency.
On October 6, 2020, the Company entered into a £1.5 billion interim facilities agreement. Upon receipt of regulatory approval of our interim facilities agreement, the Company transferred $1.4 billion of cash back into the operating accounts and the outstanding balance of our revolving credit facilities was repaid in full. Approximately $598 million of cash remains in an unrestricted account .
The COVID-19 public health emergency may exacerbate the risks associated with the Acquisition and the ongoing integration with Former Caesars.
As a result of the COVID-19 public health emergency, all of our properties were temporarily closed, and a significant majority of our employees were furloughed. The COVID-19 public health emergency has had an adverse impact on our businesses and results of operations. We cannot predict the scope, duration and impact of the COVID-19 public health emergency on our and William Hill’s businesses or on our ability to recognize the potential benefits of the Acquisition or integration with Former Caesars. We expect that the COVID-19 public health emergency may have the effect of exacerbating many of the risks related to the Merger and integration of Former Caesars’ with the Company as described in its Annual Report on Form 10-K for the year ended December 31, 2019 and the risks related to the Acquisition as described below. See “—We may fail to consummate the Acquisition or may not consummate it on the terms described herein.” The integration of two independent businesses is a complex, costly and time-consuming process and we expect that the impact of the COVID-19 public health emergency will make such integrations, both the Acquisition and the integration of Former Caesars with the Company, more challenging. Further, the Company and its subsidiaries have a significant amount of additional indebtedness outstanding following the consummation of the Merger and will have a significant amount of additional indebtedness outstanding following the consummation of the Acquisition. The Company and its subsidiaries expect to satisfy such obligations with cash flows from operations, which may be adversely impacted by the COVID-19 public health emergency, cash on hand, borrowings under committed credit facilities, additional financing and proceeds from asset sales.
We may fail to consummate the Acquisition or may not consummate it on the terms described herein.
On September 30, 2020, we agreed to acquire William Hill plc for a cash purchase price of approximately £2.9 billion , or $3.7 billion (the “Acquisition”). We intend to consummate the Acquisition in the second half of 2021. The acquisition must be accepted by a requisite number of William Hill shareholders and the closing of such transaction is subject to the receipt of
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regulatory approvals and other customary closing conditions. As a result, the possible timing and likelihood of the completion of the Acquisition are uncertain, and, accordingly, there can be no assurance that such acquisition will be completed on the expected terms, anticipated schedule or at all.
We may not consummate the Acquisition or realize the expected benefits therefrom if we do. In the event that we fail to consummate the Acquisition, we will have issued a significant number of additional shares of common stock and we will not have acquired the revenue generating assets that will be required to produce the earnings and cash flow we anticipated. As a result, failure to consummate the Acquisition would adversely affect our earnings per share and our ability to make distributions to stockholders. If the Acquisition is not consummated, we could be subject to a number of risks that may adversely affect our business and the market price of our common stock, including:
• we will be required to pay costs relating to the Acquisition, such as legal, accounting, financial advisory and printing fees, whether or not the Acquisition is consummated;
• time and resources committed by our management to matters relating to the Acquisition could otherwise have been devoted to pursuing other beneficial opportunities;
• the market price of our common stock could decline to the extent that the current market price reflects a market assumption that the Acquisition will be consummated; and
• we would not realize the benefits we expect to realize from consummating the Acquisition.
We cannot provide any assurance that the Acquisition will be consummated or that there will not be a delay in the consummation of the Acquisition. Any increased costs associated with the delay or abandonment of the Acquisition, in addition to the impact of the COVID-19 public health emergency, may adversely impact our ability to remain in compliance with our covenants contained in the agreements governing our indebtedness and lease obligations, and our liquidity. See “—The COVID-19 public health emergency may exacerbate the risks associated with the Acquisition and the ongoing integration with Former Caesars.”
If the Acquisition is not consummated, our reputation in our industry and in the investment community could be damaged, and the market price of our common stock could decline.
The Acquisition is subject to the receipt of governmental approvals that may impose conditions that could have an adverse effect on us or, if not obtained, could prevent consummation of the Acquisition.
Consummation of the Acquisition is conditioned upon the receipt of governmental approvals, including, without limitation, antitrust and gaming regulatory approvals, including, among others, the Danish Gaming Authority, the Gambling Commissioner of Gibraltar, the Gaming Board For the Bahamas, Colorado Division of Gaming, Washington D.C. Office of Lottery and Charitable Games, Delaware Lottery, Florida Division of Pari-mutuel Wagering, Illinois Gaming Board, Indiana Gaming Commission, Iowa Racing and Gaming Commission, Michigan Gaming Control Board, Mississippi Gaming Commission, Nevada Gaming Control Board and Gaming Commission, New Jersey Division of Gaming Enforcement, Mescalero Apache Tribal Gaming Commission, Rhode Island Lottery, West Virginia Lottery and the National Indian Gaming Commission. There can be no assurance that these approvals will be obtained and that the other conditions to consummating the Acquisition will be satisfied. In addition, the governmental authorities from which the regulatory approvals are required may impose conditions on the consummation of the Acquisition or require changes to the terms of the Acquisition or agreements to be entered into in connection with the Acquisition. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying or impeding consummation of the Acquisition or of imposing additional costs or limitations on us following consummation of the Acquisition, any of which might have an adverse effect on our business, financial condition and results of operations.
Governmental gaming regulatory requirements may delay the timing of the approvals for or completion of the Acquisition.
The gaming and racing industries are highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. We are subject to extensive regulation under laws, rules and supervisory procedures primarily in the jurisdictions where our facilities are located or docked. These laws, rules and regulations generally concern the responsibility, financial stability and characters of the owners, managers, and persons with financial interests in the gaming operations. Some jurisdictions require applications for findings of suitability, licensing or other approvals for owners of our stock exceeding certain thresholds. If a person purchases stock in us in an amount that results in such person attaining or exceeding thresholds of ownership requiring regulatory approvals from one or more gaming jurisdictions, the regulators could take the position that such person must make the requisite filings or obtain the requisite approvals from the regulator prior to receiving regulatory
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approval for or completing the Acquisition. If such a position were taken, this could result in a delay in the timing of the approvals for or the consummation of the Acquisition. We cannot predict whether a gaming regulator may take such a position.
Antitrust approvals that would be required to consummate the Acquisition may not be received, may take longer than expected or may impose conditions, including the requirement to divest assets, that could have an adverse effect on us following the Acquisition.
In order to consummate the Acquisition, we and William Hill may be required to comply with divestitures, including selling properties, conditions, terms, obligations or restrictions imposed by antitrust, gaming and other regulatory entities, and such conditions, terms, obligations or restrictions may have the effect of delaying consummation of the Acquisition, imposing additional material costs on or materially limiting our revenue after the consummation of the Acquisition, or otherwise reducing the anticipated benefits to us of the Acquisition. Such conditions, terms, obligations or restrictions may result in the delay or abandonment of the Acquisition. We may be required to comply with divestitures, including selling properties, conditions, terms, obligations or restrictions imposed by antitrust, gaming and other regulatory entities, and such conditions, terms, obligations or restrictions may have the effect of delaying the consummation of the Acquisition, imposing additional material costs on or materially limiting our revenue after the consummation of the Acquisition, or otherwise reducing the anticipated benefits to us of the Acquisition. Such conditions, terms, obligations or restrictions may result in the delay or abandonment of the Acquisition. We cannot assure you that we or William Hill will be able to sell these required properties in order to be in compliance with such antitrust, gaming and other regulatory entities, within the time frame required. In addition, to the extent we and/or William Hill are able to sell any such properties, we cannot assure you that we or they will be able to sell such properties at a fair market price or upon terms and conditions that are beneficial or considered reasonably satisfactory by us or William Hill, as applicable. As a result, we and William Hill may not be able to realize any expected benefits from such asset dispositions, and may not receive adequate consideration in connection therewith.