It’s often said about Leo Tolstoy’s War and Peace that reading this classic novel is a challenge even for those with great memories. So many characters to follow. There are even websites devoted to helping the willing reader keep track of the myriad characters.
The challenge of reading War and Peace came to mind while reading The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street, by Max Frumes and Sujeet Indap. Nearly every well-spaced chapter introduces some new person or persons (and debt classification) to the story of Apollo and Texas Pacific Group’s ill-fated acquisition of Caesars Entertainment, and the endless financial and legal maneuvering that followed a seemingly rare (in the high profile sense) misstep by two of the most highly regarded private equity investing groups in the world.
Though the authors properly list “Select Key Characters” at the 2021 book’s beginning, it’s not enough. Though some of the main players in a financial saga that took place over eleven years are mostly easy to track, there are so many other minor players introduced throughout. Some are very interesting even. But the myriad names made for an at times frustrating read of a book that one senses gave its authors fits in the writing of. About this, seemingly all book-writing has Orwellian qualities whereby the time spent doing it resembles “a long illness.” The countless introductions of new people to the story is probably something the authors wish they could have back. The debt-heavy acquisition of Caesars and what followed is an interesting story, but the view here is that what might have been fascinating got lost in minutiae about people and countless versions of debt.
As previously mentioned, the main players in the book are Leon Black’s Apollo Global Management and David Bonderman’s Texas Pacific Group. In 2007 the two firms engineered a $28 billion buyout of Caesars Entertainment, the gambling behemoth. The story told is largely what happens after, but many readers will be turned off at the outset by some weak, rather baseless assertions made by Frumes and Indap. It’s hard to know if the authors believed them, or if they were trying to create intrigue in order to pull readers in. Whatever the answer, they left a sour taste.
About Black’s investing style, they indicate that funds operated by firms like Apollo “scoop up the debt of troubled companies for nickels and dimes and take control of over-indebted but otherwise viable companies.” If only if it were that easy. More realistically, the authors’ description was a contradiction. Companies with debt selling for nickels and dimes on the dollar are plainly seen by the markets as much less than viable as the cost of their debt indicates. As opposed to easy, the investing that made Black and others in the distressed space rich brings new meaning to intrepid. If the investing were simple, or obvious, there wouldn’t be distressed-debt billionaires for the authors to write about.
More on Black, they assert that he “had formed Apollo to exploit the imploding debt markets that” Michael Milken and Drexel Burnham “had wrought.” Nonsense. Before Drexel was needlessly strangled by the feds, returns on high yield bonds only trailed those of credit cards for the institutions that were invested in them. After which, the authors need only consider the various characters in their book. Many are billionaires, or on the way to that status. If Milken et al had “wrought” a false or “imploding” market, then logic dictates that high yield would have disappeared with his own. Except that it didn’t. It’s arguably more essential than ever as traditional banks retreat even further from risk.
About Drexel’s 1990 bankruptcy filing, the authors tie it to the “fallout of the sprawling and spectacular crime spree masterminded by its larger-than-life banker, the so-called ‘junk bond king,’ Michael Milken.” Except that the ticky-tack “violations” overzealous prosecutors got Milken on had never been prosecuted before. With Milken it was a witch hunt. Plain and simple. Contrary to what the authors convey to readers, Milken was a brilliant capitalist whose genius at creating capital structures combined with a spectacular ability to raise money thoroughly transformed commerce for the better. The “unseen” when it comes to imagining the great companies never seeded due to Milken being banned from the securities industry boggles the mind. And it saddens wise minds. Prosperous as the U.S. is today, the view here is that it would be quite a bit more prosperous if Milken were still rushing a much better future into the present with his brilliant financial mind, and arguably an even better mind when it comes to intimately understanding businesses. What a loss. Shame on the authors for drawing Milken as a criminal figure.
Back to the story, it’s interesting to contemplate the optimism that enabled such a big buyout. A year later there’s little chance the same deal would have been matched with similar financing. Which is no insight. The authors write that buyers “Apollo and TPG were unworried, as casinos had historically been recession-proof.” Caesars had been operating successfully “in an environment of varying economic conditions in the wake of 9/11, the SARS scare, a recession, and the wars in Iraq and Afghanistan.” A seemingly recession-proof business overseen by two of the best buyout groups in the world plainly rendered the deal more than reasonable. The markets seemed to agree as evidenced by generally risk-averse banks committing $20.5 billion to the buyout, $1.325 billion each from Apollo and TPG, after which highly sophisticated investors like Goldman Sachs, Blackstone, Oaktree Capital, New England Patriots owner Bob Kraft, and others like them came in for $3.4 billion.
Then 2008 happened. Without going deep into why it happened (the view here is that the very bailouts and interventions that are said to have “saved” the world were actually the cause of the crisis), what readers doubtless remember is that by September of 2008 the U.S. and global economies were in ferociously bad shape. The latter tested the “recession-proof” belief among the buyers that had informed past investments in the casino sector. The past proved a lousy indicator of what was ahead. Frumes and Indap report that “Between 2007 and 2009, overall visitors to Las Vegas fell by nearly seven percent, but gambling revenue fell by nearly 20 percent. Americans were still coming to Sin City, but it was a different crowd spending far less money.” This more brutal reality didn’t factor into the $28 billion dollar deal. In other words, it quickly became apparent that Apollo and TPG had overpaid.
With it increasingly apparent that Caesars’ various casinos couldn’t generate the returns necessary for the company to pay off its debts, all manner of financial restructurings were pursued by owners Apollo and TPG in order to avoid bankruptcy. Geniuses on all matters financial, they would use the restructurings to buy time for Caesars to revive itself. In the authors’ words, Caesars “fundamental problems of too much debt and nowhere near enough cash flow” made the future insurmountable without major adjustments.
The problem was that some of the holders of Caesars debt (Oaktree Capital and Appaloosa in particular) didn’t approve of how Apollo and TPG were restructuring. Owners of some of the more junior debt issued by Caesars, Apollo and TPG were trying to get them to accept haircuts of the .9 cents on the dollar variety. Except that Oaktree and Appaloosa didn’t reach their highly prominent perches by laying down easily. So while there was an argument for accepting .9 cents in order to avoid getting on Apollo’s bad side (there would be future buyouts, and future high potential deals to do with a firm that was right more often than it was wrong), not this time. Oaktree and Appaloosa geared up for a fight.
The speculation here is that the years of lawsuits and brinksmanship is where the authors ran into trouble. That’s the case because they weren’t writing an academic book. The Caesars Palace Coup is billed as a logical spawn of other business thrillers like Barbarians at the Gate and The Big Short. Put another way, Frumes, Indap and their publishers desired a mass market business book. What they instead delivered was endless detail that was hard to keep track of, which meant lots of passages like David Sambur’s (Apollo) “explanation of the circumstances of the 2014 $1.75 billion B-7 term loan financing proved to be most controversial.” Every chapter was dense with references like this.
To which some will reasonably say that your reviewer isn’t a debt expert, and as such it’s only natural that the endless references would often prove head scratching. So true. But also the point. A book meant to be the next heavily-passed-around business story must be written with the mass market in mind. This one wasn’t. One guesses that even those close to the Caesars deal would find the book hard to follow.
The main thing is that Apollo and TPG found Caesars in a desperate situation that it couldn’t grow its way out of, only for them to attempt to restructure the company in a way that was favorable to Apollo and TPG. In the words of Oaktree’s Ken Liang, “they sold our casinos for $1 to themselves and we are asking for it back.” Apollo and TPG had a fiduciary responsibility to their investors to achieve the most advantageous solution, but so did Oaktree and Appaloosa owe their own investors a better outcome than what was being offered. Lawsuits that generated hundreds of millions worth of fees to leading firms like Kirkland & Ellis ensued. At one point the authors reference how Kirkland ran up $200,000 in printing fees alone.
Where it gets interesting is that Apollo in particular is not used to losing battles like this. As mentioned earlier, it’s right more often than it’s wrong as evidenced by the gargantuan sums it has under management. And precisely because it sees the best deals in “first look” fashion, rare is the investor that will anger it. The difference was that Oaktree’s founders were and are, like Apollo’s, billionaires. Appaloosa’s David Tepper is arguably the richest of them all. In trying to short-change Oaktree and Appaloosa, Apollo and TPG had essentially met their match. And much more.
Amid lots of legal maneuvering an examiner’s report was released in Nevada in which an opinion on the Apollo/TPG machinations was rendered. The report concluded that Apollo and TPG had been aware for many years that the Caesars operating company was almost certainly doomed, but despite knowing this did little to protect the company’s creditors; choosing instead to favor their own equity investments. The report turned the tide to say the least, and in favor of Apollo and Oaktree. In the words of the authors, “It did not happen often,” but “Apollo had been defeated on the field.”
While the junior debtholders had as previously mentioned been offered .9 cents on the dollar, they ultimately got .66 cents. The creditors (senior and junior) would also own 2/3rds of the new Caesars in the settlement. Apollo and TPG would come away with 14% of the company, but also lose their initial investment. Arguably most interesting about all that transpired is that with time, Caesars was worth more than the $28 billion initially paid. Apollo and TPG were right, but their timing was off. Except that with investing, timing is obviously crucial. Indeed, while we still hear about John Paulsen’s legendary bet against mortgages (including in The Caesars Palace Coup), we don’t hear about many more investors who similarly had grown skeptical about mortgages, but who expressed their sentiment too early. What built Paulsen’s legend was timing, and what blemished the still brilliant reputations of Apollo and TPG was also timing.
More specifically, the authors indicate that even the heavyweights of investing “had steered clear of the second-lien bonds,” and they stayed away from them given their desire to avoid a “fight with Apollo that would have come with owning those bonds.” Not so Oaktree and Appaloosa, which means that they captured the majority of the upside when Caesars ultimately recovered.
Away from the slugfest that was the book’s story, there were some interesting anecdotes reported within. Frumes and Indap spend a lot of time on Caesars CEO Gary Loveman’s quest “to understand everything” about the “people who gambled at Harrah’s tables, ate in its restaurants, and slept in its beds, so he could persuade them to never stray.” Loveman’s focus on data proved highly remunerative, and it’s notable amid all the modern hand wringing about Facebook focusing intensely on understanding its users. Learning about one’s customers is as old as commerce is, and it invariably redounds to the customer via better service outcomes. Confused journalists and pundits have near criminalized what is routine.
The gaming industry is heavily regulated, which is well known. What’s not as well-known is how the regulators generally don’t have a clue about gaming. This should be a statement of the obvious in that regulators in general are the people who could not get real jobs in the industry they’re charged with overseeing. It’s notable here because the authors make plain that people like Loveman “found gaming commissioners to be contemptible.” Regulation doesn’t help; rather it’s a wasteful hindrance. Competition is a much better regulator, but politicians like to hand out cush jobs that put the untalented in a position to browbeat the talented.
Many conservatives lament the “woke” nature of corporations. More realistically, corporations have myriad constituencies to please in order to do business. Applied to Caesars, the authors note that the business “made sure” to donate “heavily to the right causes – the NAACP and the like – to maintain warm relationships with people who could potentially cause trouble. It was simply a cost of doing business.” Amen. Businesses sometimes have to play politics not because they want to, but because they have to.
Little anecdotes like the three mentioned are found throughout the book, and they’re useful.
Still, the book’s problem remains one of how it was put together. It became very difficult to follow. Funny about the book’s readability is that in commenting on the aforementioned 1,803 page examiner’s report that put Oaktree and Appaloosa in the driver’s seat, one judge on the case referred to it as “Tolstoyesque.” No doubt, except that something similar could be said about The Caesars Palace Coup. There’s a good story there, but it was arguably lost in the characters and layers of debt.