Potential Fertitta Acquisition of Caesars Entertainment Raises Change-of-Control Questions Across Caesars Capital Stack

• An acquisition resulting in more than 50% voting ownership of Caesars Entertainment would likely trigger a change of control under the credit agreement and bond indentures because Tilman Fertitta is unlikely to fall within the definition of “Permitted Holder.”
• A transaction could potentially avoid the change-of-control trigger if Fertitta limits voting ownership to 50% or less and partners with existing permitted holders in a permitted holder group in which no person or group other than a permitted holder beneficially owns more than 50% of the voting equity.
• Any acquisition structure would also need to consider change-of-control provisions across the broader debt stack, as the credit agreement contains a cross-referenced trigger to other material debt instruments that could independently create default risk.
• A change of control under the bond indentures would not trigger a default under the bonds but would instead require Caesars Entertainment to make an offer to purchase the bonds at 101%. The attractiveness of those offers would depend on the trading prices of the bonds at the time of the offers.

Caesars Entertainment has been in takeover discussions with billionaire investor Tilman Fertitta, whose company Fertitta Entertainment is reportedly offering roughly $34 per share, resulting in an implied transaction value of about $7 billion. The Fertitta bid exceeds a competing all-cash proposal of approximately $33 per share from Carl Icahn’s firm, Icahn Enterprises, which remains under consideration. While negotiations are ongoing, it has been reported that no transaction is imminent and discussions may not result in a deal. On March 12, Caesars’ shares closed at $28.41, giving the company a market value of over $5 billion.

Fertitta’s business empire includes the Golden Nugget casino chain, Landry’s and the NBA’s Houston Rockets. Caesars operates more than 50 resorts and casinos under brands including Caesars, Harrah’s, Eldorado and Circus Circus. The company’s shares had declined roughly 40% over the past year prior to the recent reports of takeover interest.

A potential complication relates to VICI Properties, an REIT that following Caesars’ 2017 bankruptcy restructuring owns many Caesars properties and leases them back to the operator. Depending on deal structures and whether the transaction constitutes a change of control under applicable lease agreements, VICI’s consent may also be required.

The credit agreement contains a two-part change of control definition. First, a change of control will be deemed to occur automatically if a similar event occurs under certain other debt instruments in the capital structure. Specifically, the provision cross-references the company’s 2027 senior unsecured notes, 2025 senior secured notes and 2029 senior unsecured notes as well as certain debt to refinance those notes or any “junior financing” exceeding $400 million. This provision operates as a cross-trigger – a change of control under any of the specified instruments will also constitute a change of control under the credit agreement.

Second, the credit agreement definition includes a beneficial ownership trigger, under which a change of control will occur if any person or group (within the meaning of sections 13(d) and 14(d) of the Exchange Act), other than certain excluded parties – including Permitted Holders – becomes the beneficial owner of more than 50% of the borrower’s voting equity interests.

The definition also clarifies that shares subject to a stock purchase agreement, merger agreement, option agreement or similar transaction document will not be treated as beneficially owned until the acquisition actually closes. As a result, signing a transaction agreement alone would not trigger a change of control, which would occur only upon consummation of the acquisition of the relevant equity interests.

Caesar’s 6.5% senior secured notes due 2032, 7% senior secured notes due 2030, 4.625% senior notes due 2029 and 6% senior notes due 2032 (collectively, the “Bond Indentures”) each includes a beneficial ownership change-of-control trigger with the same requirements.

The change of control definition in the credit agreement and Caesar’s Bond Indentures raises the question of whether an acquisition by Fertitta or its affiliated entities could fall within the Permitted Holder concept and therefore avoid triggering the beneficial ownership change of control. Under the credit agreement and the Bond Indentures, a change of control occurs if, among other triggers, any “person” or “group” other than Permitted Holders becomes the “beneficial owner,” directly or indirectly, of more than 50% of the borrower’s voting equity interests. Accordingly, the key issue is whether Fertitta or an acquisition vehicle controlled by him or his affiliates could qualify as a Permitted Holder.

Based on the definition, Fertitta would not appear to qualify directly as a Permitted Holder. The enumerated categories include:

• “Management Group”: defined as a group consisting of the company’s directors, executive officers and other management at the time of the applicable debt issuance, together with any new directors approved by a majority of the directors at such time and any directors whose election was previously approved by such directors, and executive officers and management hired at a time when the foregoing persons constituted a majority of the board of directors;
• “Carano Holders”: defined as specified members of the Carano family and their spouses or lineal descendants and related estate planning entities;
• Certain holding companies: limited to entities whose only material assets consist of equity in the borrower or other Permitted Holders, and that own 100% of the equity of the borrower, provided no person or group other than Permitted Holders owns more than 50% of the voting equity of the holding company;
• Any “Permitted Holder Group”: defined as a group, the members of which include any Permitted Holders provided (1) the members of the group have voting rights proportional to their ownership interests and (2) no person or other group other than the Permitted Holders beneficially owns more than 50% of the voting interests held by the Permitted Holder Group.

Unless Fertitta became part of the Management Group, it does not appear that he would be a Permitted Holder. Even if Fertitta became a Management Holder, the applicable definitions are not drafted broadly enough such that Fertitta Entertainment would be a Permitted Holder, including for purposes of ownership in a holding company or Permitted Holder Group.

We note in this regard that the beneficial ownership prong of the change of control definition and definition of Permitted Holder do not include a “related party” concept that would pick up entities affiliated with a Permitted Holder, although this concept is included in the prong related to sales of substantially all the company’s assets (other than through merger).

The Permitted Holder Group concept provides some theoretical flexibility but may be difficult to satisfy in practice. This provision allows a “group” including existing Permitted Holders to qualify, provided that no non-Permitted Holder beneficially owns more than 50% of the voting equity held by the group and that voting rights are proportional to ownership interests.

In theory, Fertitta could partner with existing Permitted Holders (such as members of the Management Group or the Carano Holders) and structure the acquisition so that no single non-Permitted Holder controls more than 50% of the group. Whether this approach would work in practice would depend on the existing ownership structure and the willingness of those holders to participate in the transaction.

Absent Permitted Holder status, and unless Fertitta just elects to repay the existing facility (which would be the more likely outcome), Fertitta would need to consider transaction structures designed to avoid exceeding the beneficial ownership threshold.One straightforward approach would be to limit Fertitta’s direct and indirect voting ownership to 50% or less of the borrower’s voting equity. Because the definition is triggered only when a person or group becomes the beneficial owner of “more than 50%,” a structure in which Fertitta holds exactly 50% or less of the voting equity, with the remainder held by other investors, would not trigger the provision; provided those investors are not deemed to form a “group” under the Exchange Act beneficial ownership rules.

Lenders and other stakeholders should remain mindful that the credit agreement’s change-of-control provision is linked to other material debt instruments through cross-referenced change-of-control provisions. Even if a transaction could technically be structured to avoid the beneficial ownership trigger under the credit agreement, the acquisition would also need to be evaluated under the change-of-control provisions in the company’s other material debt and its lease agreements with VICI Properties and others, which may impose additional constraints on transaction structuring.

Unlike the credit agreement, a change of control is not a default under the Bond Indentures. A change of control would require that the issuer make an offer to purchase the bonds at 101%. Whether this offer would be attractive to bondholders would be dependent upon the trading price of the various bonds at the time of the offer.

In summary, Fertitta is unlikely to qualify directly as a Permitted Holder, meaning that an acquisition structure resulting in more than 50% voting ownership would likely trigger the change-of-control provision. Avoiding the trigger would therefore likely require transaction structuring, such as limiting voting ownership to 50% or less, introducing co-investors to avoid majority beneficial ownership, or potentially forming a Permitted Holder Group with existing Permitted Holders.

Each of these approaches would need to be evaluated in light of the beneficial ownership rules under the Exchange Act and the related change-of-control provisions across the broader debt stack.