| Acquisitions and Purchase Price Accounting | Acquisitions and Purchase Price Accounting Merger with Caesars Entertainment Corporation On July 20, 2020, the Merger was consummated and Former Caesars became a wholly-owned subsidiary of the Company. The strategic rationale for the Merger includes, but is not limited to, the following: • Creation of the largest owner, operator and manager of domestic gaming assets • Diversification of the Company’s domestic footprint • Access to iconic brands, rewards programs and new gaming opportunities expected to enhance customer experience • Realization of significant identified synergies The total purchase consideration for Former Caesars was $10.9 billion. The estimated purchase consideration in the acquisition was determined with reference to its acquisition date fair value. (In millions) Consideration Cash consideration paid $ 6,090 Shares issued to Former Caesars shareholders (a) 2,381 Cash paid to retire Former Caesars debt 2,356 Other consideration paid 48 Total purchase consideration $ 10,875 (a) Former Caesars common stock was converted into the right to receive approximately 0.3085 shares of the Company’s Common Stock, with a value equal to approximately $12.41 in cash (based on the volume weighted average price per share of the Company’s Common Stock for the ten trading days ending on July 16, 2020). Final Purchase Price Allocation The fair values are based on management’s analysis including work performed by a third-party valuation specialist, which were finalized over the one-year measurement period. The following table summarizes the allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed of Former Caesars, with the excess recorded as goodwill as of September 30, 2021: (In millions) Fair Value Current and other assets $ 3,540 Property and equipment 13,096 Goodwill 9,064 Intangible assets (a) 3,394 Other noncurrent assets 710 Total assets $ 29,804 Current liabilities $ 1,771 Financing obligation 8,149 Long-term debt 6,591 Noncurrent liabilities 2,400 Total liabilities 18,911 Noncontrolling interests 18 Net assets acquired $ 10,875 ____________________ (a) Intangible assets consist of gaming rights valued at $396 million, trade names valued at $2.1 billion, Caesars Rewards programs valued at $523 million and customer relationships valued at $425 million. The fair values of the assets acquired and liabilities assumed were determined using the market, income, and cost approaches, or a combination. Valuation methodologies under both a market and income approach used for the identifiable net assets acquired in the Former Caesars acquisition make use of Level 3 inputs, such as expected cash flows and projected financial results. The market approach indicates value for a subject asset based on available market pricing for comparable assets. Trade receivables and payables and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the estimated fair value of those items at the Former Caesars acquisition date. Assets and liabilities held for sale are recorded at fair value, less costs to sell, based on the agreements reached as of the acquisition date, or an income approach. Certain financial assets acquired were determined to have experienced more than insignificant deterioration of credit quality since origination. A reconciliation of the difference between the purchase price of financial assets, including acquired markers, and the face value of the assets is as follows: (In millions) Purchase price of financial assets $ 95 Allowance for credit losses at the acquisition date based on the acquirer’s assessment 89 Discount (premium) attributable to other factors 2 Face value of financial assets $ 186 The fair value of land was determined using the sales comparable approach. The market data is then adjusted for any significant differences, to the extent known, between the identified comparable sites and the site being valued. The value of building and site improvements was estimated via the income approach. Other personal property assets such as furniture, gaming and computer equipment, fixtures, computer software, and restaurant equipment were valued using the cost approach which is based on replacement or reproduction costs of the asset. The cost approach is an estimation of fair value developed by computing the current cost of replacing a property and subtracting any depreciation resulting from one or more of the following factors: physical deterioration, functional obsolescence, and/or economic obsolescence. Non-amortizing intangible assets acquired primarily include trademarks, Caesars Rewards and gaming rights. The fair value for these intangible assets was determined using either the relief from royalty method and excess earnings method under the income approach or a replacement cost market approach. Trademarks and Caesars Rewards were valued using the relief from royalty method, which presumes that without ownership of such trademarks or loyalty program, the Company would have to make a stream of payments to a brand or franchise owner in return for the right to use their name or program. By virtue of this asset, the Company avoids any such payments and records the related intangible value of the Company’s ownership of the brand name or program. The acquired trademarks, including Caesars Rewards are indefinite lived intangible assets. Customer relationships are valued using an income approach, comparing the prospective cash flows with and without the customer relationships in place to estimate the fair value of the customer relationships, with the fair value assumed to be equal to the discounted cash flows of the business that would be lost if the customer relationships were not in place and needed to be replaced. We estimate the useful life of these customer relationships to be approximately seven years from the Merger date. Gaming rights include our gaming licenses in various jurisdictions and may have indefinite lives or an estimated useful life. The fair value of the gaming rights was determined using the excess earnings or replacement cost methodology, based on whether the license resides in gaming jurisdictions where competition is limited to a specified number of licensed gaming operators. The excess earnings methodology is an income approach methodology that estimates the projected cash flows of the business attributable to the gaming license intangible asset, which is net of charges for the use of other identifiable assets of the business including working capital, fixed assets and other intangible assets. The replacement cost of the gaming license was used as an indicator of fair value. The acquired gaming rights have indefinite lives, with the exception of one jurisdiction in which we estimate the useful life of the license to be approximately 34 years from the Merger date. Goodwill is the result of expected synergies from the operations of the combined company and the assembled workforce of Former Caesars. The final assignment of goodwill to our reporting units has not been completed. The goodwill acquired will not generate amortization deductions for income tax purposes. The fair value of long-term debt has been calculated based on market quotes. The fair value of the financing obligations were calculated as the net present value of both the fixed base rent payments and the forecasted variable payments plus the expected residual value of the land and building returned at the end of the expected usage period. The Company recognized acquisition-related transaction costs of $6 million and $107 million for the three months ended September 30, 2021 and 2020, respectively, and $21 million and $129 million for the nine months ended September 30, 2021 and 2020, respectively, in connection with the Merger. Transaction costs were associated with legal, IT costs, internal labor and professional services and were recorded in Transaction costs and other operating costs in our Statements of Operations. For the period of January 1, 2021 through September 30, 2021, the properties of Former Caesars generated net revenues of $5.3 billion, excluding discontinued operations, and a net loss of $411 million. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information is presented to illustrate the estimated effects of the acquisition of Former Caesars as if it had occurred on January 1, 2020. The pro forma amounts include the historical operating results of the Company and Former Caesars prior to the acquisition, with adjustments directly attributable to the acquisition. The pro forma results include adjustments and consequential tax effects to reflect incremental depreciation and amortization expense to be incurred based on preliminary fair values of the identifiable property and equipment and intangible assets acquired, the incremental interest expense associated with the issuance of debt to finance the acquisition and the adjustments to exclude acquisition related costs incurred during the three and nine months ended September 30, 2020 as if incurred in the first quarter of 2020. The unaudited pro forma financial information is not necessarily indicative of the financial results that would have occurred had the Merger been consummated as of the dates indicated, nor is it indicative of any future results. In addition, the unaudited pro forma financial information does not reflect the expected realization of any synergies or cost savings associated with the Merger. (In millions) Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Net revenues $ 1,639 $ 4,145 Net loss (989) (2,266) Net loss attributable to Caesars (927) (2,200) Acquisition of William Hill On April 22, 2021, we completed the previously announced acquisition of William Hill PLC for cash consideration of approximately £2.9 billion, or approximately $3.9 billion, based on the GBP to USD exchange rate on the closing date . Prior to the acquisition, William Hill PLC’s U.S. subsidiary, William Hill U.S. Holdco (“William Hill US” and together with William Hill PLC, “William Hill”) operated 37 sportsbooks at our properties in eight states. Following the William Hill Acquisition, we conduct sports wagering in 18 states across the U.S. plus the District of Columbia. Additionally, we operate regulated online real money gaming businesses in five states and continue to leverage the World Series of Poker (“WSOP”) brand, and license the WSOP trademarks for a variety of products and services. Extensive usage of digital platforms, continued legalization in additional states, and growing bettor demand are driving the market for online sports betting platforms in the U.S. and the William Hill Acquisition positioned us to address this growing market. On September 8, 2021, the Company entered into an agreement to sell William Hill International to 888 Holdings Plc for approximately £2.2 billion. The sale is subject to satisfaction of customary conditions, including receipt of the approval of shareholders and regulatory approvals, and is expected to close in the first quarter of 2022. The Company previously held an equity interest in William Hill PLC and William Hill US (see Note 4). Accordingly, the acquisition is accounted for as a business combination achieved in stages, or a “step acquisition.” As mentioned above, the total purchase consideration for William Hill was approximately $3.9 billion . The estimated purchase consideration in the acquisition was determined with reference to its acquisition date fair value. (In millions) Consideration Cash for outstanding William Hill common stock (a) $ 3,909 Fair value of William Hill equity awards 30 Settlement of preexisting relationships (net of receivable/payable) 7 Settlement of preexisting relationships (net of previously held equity investment and off-market settlement) (34) Total purchase consideration $ 3,912 ____________________ (a) William Hill common stock of approximately 1.0 billion shares as of the acquisition date was paid at £2.72 per share, or approximately $3.77 per share using the GBP to USD exchange rate on the acquisition date. Preliminary Purchase Price Allocation The purchase price allocation for William Hill is preliminary as it relates to determining the fair value of certain assets and liabilities, including goodwill, and is subject to change. The fair values are based on management’s analysis including preliminary work performed by third-party valuation specialists, which are subject to finalization over the one-year measurement period. The following table summarizes the preliminary allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed of William Hill, with the excess recorded as goodwill as of September 30, 2021: (In millions) Fair Value Other current assets $ 160 Assets held for sale 4,375 Property and equipment, net 55 Goodwill 1,102 Intangible assets (a) 565 Other noncurrent assets 307 Total assets $ 6,564 Other current liabilities $ 249 Liabilities related to assets held for sale (b) 2,130 Deferred income taxes 228 Other noncurrent liabilities 35 Total liabilities 2,642 Noncontrolling interests 10 Net assets acquired $ 3,912 ____________________ (a) Intangible assets consist of gaming rights valued at $80 million, trademarks valued at $27 million , developed technology valued at $110 million , reacquired rights valued a t $280 million and user relationships valued at $68 million. (b) Includes debt of $1.1 billion related to William Hill International at the acquisition date. The Company entered into an agreement on September 8, 2021 to sell William Hill International to 888 Holdings Plc for approximately £2.2 billion. The assets and liabilities held for sale noted above are substantially all related to William Hill International. As noted above, the purchase price allocation was subject to a measurement period and, due to the agreement with 888 Holdings Plc, the estimates of fair values as of September 30, 2021 have been revised. Total purchase consideration decreased by $54 million related to the value of the preexisting relationships, specifically our previously held equity investment and off-market contract settlement. Additionally, the estimated fair value of the assets and liabilities held for sale at the time of the William Hill Acquisition have been adjusted to reflect the sale price with 888 Holdings Plc. The net impact of the changes was a decrease of $3 million in other current assets, a $521 million increase to assets held for sale, a $271 million decrease to goodwill, a $131 million decrease to intangible assets, a $27 million increase to liabilities held for sale, and a $143 million increase to deferred income taxes. The effect of these revisions resulted in a change in the estimated value of our previously held investment in William Hill US and we recorded a $54 million loss during the quarter, for a total loss of $75 million during the nine months ended September 30, 2021, which is included in Other income (loss) on the Statement of Operations. The fair values of the assets acquired and liabilities assumed were determined using the market, income, and cost approaches, or a combination. Valuation methodologies under both a market and income approach used for the identifiable net assets acquired in the William Hill acquisition make use of Level 3 inputs, such as expected cash flows and projected financial results. The market approach indicates value for a subject asset based on available market pricing for comparable assets. Trade receivables and payables and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the estimated fair value of those items at the William Hill acquisition date. Assets and liabilities held for sale substantially represent William Hill International which has been initially valued using a combination of approaches including a market approach based on valuation multiples and EBITDA, the relief from royalty method and the replacement cost method. In addition to the approaches described, our estimates have been updated to reflect the sale price of William Hill International in the proposed sale to 888 Holdings Plc, described above. The acquired net assets of William Hill included certain investments in common stock. Investments with a publicly available share price were valued using the share price on the acquisition date. Investments without publicly available share data were valued at their carrying value, which approximated fair value. Other personal property assets such as furniture, equipment, computer hardware, and fixtures were valued using a cost approach which determined that the carrying values represented fair value of those items at the William Hill acquisition date. Trademarks and developed technology were valued using the relief from royalty method, which presumes that without ownership of such trademarks or technology, the Company would have to make a series of payments to the assets’ owner in return for the right to use their brand or technology. By virtue of their ownership of the respective intangible assets, the Company avoids any such payments and records the related intangible value. The estimated useful lives of the trademarks and developed technology are approximately 15 years and six years, respectively, from the acquisition date. Online user relationships are valued using a cost approach based on the estimated marketing and promotional cost to acquire the new active user base if the user relationships were not already in place and needed to be replaced. We estimate the useful life of the user relationships to be approximately three years from the acquisition date. Operating agreements with non-Caesars entities allowed William Hill to operate retail and online sportsbooks as well as online gaming within certain states. These agreements are valued using the excess earnings method, estimating the projected profits of the business attributable to the rights afforded through the agreements, adjusted for returns of other assets that contribute to the generation of this profit, such as working capital, fixed assets and other intangible assets. We estimate the useful life of these operating agreements to be approximately 20 years from the acquisition date. The reacquired rights intangible asset represents the estimated fair value of the Company’s share of the William Hill’s forecasted profits arising from the prior contractual arrangement with the Company to operate retail and online sportsbooks and online gaming. This fair value estimate was determined using the excess earnings method, an income-based approach that reflects the present value of the future profit William Hill expected to earn over the remaining term of the contract, adjusted for returns of other assets that contribute to the generation of this profit, such as working capital, fixed assets and other intangible assets. The forecasted profit used within this valuation is adjusted for the settlement of the preexisting relationship noted previously in the calculation of the purchase consideration in order to avoid double counting of this settlement. Reacquired rights are amortizable over the remaining contractual period of the contract in which the rights were granted and estimated to be approximately 24 years from the acquisition date. Goodwill is the result of expected synergies from the operations of the combined company and future customer relationships including the brand names and strategic partner relationships of Caesars and the technology and assembled workforce of William Hill. The goodwill acquired will not generate amortization deductions for income tax purposes. The fair value of long-term debt assumed has been calculated based on market quotes. The Company recognized acquisition-related transaction costs of $5 million and $60 million for the three and nine months ended September 30, 2021, respectively, excluding additional transaction costs associated with sale of William Hill International. These costs were associated with legal and professional services and were recorded in Transaction costs and other operating costs in our Statements of Operations. For the period of April 22, 2021 through September 30, 2021, the operations of William Hill generated net revenues of $104 million, excluding discontinued operations (see Note 3), and a net loss of $205 million. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information is presented to illustrate the estimated effects of the William Hill Acquisition as if it had occurred on January 1, 2020. The pro forma amounts include the historical operating results of the Company and William Hill prior to the acquisition, with adjustments directly attributable to the acquisition. The pro forma results include adjustments and consequential tax effects to reflect incremental amortization expense to be incurred based on preliminary fair values of the identifiable intangible assets acquired, eliminate gains and losses related to certain investments and adjustments to the timing of acquisition related costs and expenses incurred during the three and nine months ended September 30, 2021 and to recognize these costs during the nine months ended September 30, 2020. The unaudited pro forma financial information is not necessarily indicative of the financial results that would have occurred had the William Hill Acquisition been consummated as of the dates indicated, nor is it indicative of any future results. The unaudited pro forma financial information does not include the operations of William Hill International as such operations were expected to be divested upon the acquisition date. Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Net revenues $ 2,685 $ 1,484 $ 7,106 $ 2,131 Net loss (155) (980) (427) (1,473) Net loss attributable to Caesars (157) (981) (429) (1,474) Consolidation of Horseshoe Baltimore On August 26, 2021, the Company increased its ownership interest in Horseshoe Baltimore, a property which it also manages, to approximately 75.8% for cash consideration of $55 million. Subsequent to the change in ownership, the Company was determined to have a controlling financial interest and has begun to consolidate the operations of Horseshoe Baltimore. Prior to the purchase, the Company held an interest in Horseshoe Baltimore of approximately 44.3% which was accounted for as an equity method investment. Our previously held investment was remeasured as of the date of our change in ownership and the Company recorded a gain of approximately $40 million, which was recorded in Other income (loss) on the Statement of Operations . (In millions) Consideration Cash for additional ownership interest $ 55 Preexisting relationships (net of receivable/payable) 18 Preexisting relationships (previously held equity investment) 81 Total purchase consideration $ 154 Preliminary Purchase Price Allocation The purchase price allocation for Horseshoe Baltimore is preliminary as it relates to determining the fair value of certain assets and liabilities, including potential goodwill, and is subject to change. The estimated fair values are based on management’s analysis, including preliminary work performed by a third-party valuation specialist, which is subject to finalization over the one-year measurement period. The following table summarizes the preliminary allocation of the purchase consideration to the identifiable assets and liabilities of Horseshoe Baltimore, with any potential excess recorded as goodwill as of September 30, 2021: (In millions) Fair Value Current assets $ 60 Property and equipment, net 215 Intangible assets (a) 241 Other noncurrent assets 136 Total assets $ 652 Current liabilities $ 26 Long-term debt 272 Other long-term liabilities 158 Total liabilities 456 Noncontrolling interests 42 Net assets acquired $ 154 ____________________ (a) Intangible assets consist of gaming rights valued at $232 million and customer relationships valued at $9 million. The fair values of the assets acquired and liabilities assumed were determined using the market, income, and cost approaches, or a combination. Valuation methodologies under both a market and income approach used for the identifiable net assets acquired in the Horseshoe Baltimore acquisition make use of Level 3 inputs, such as expected cash flows and projected financial results. The market approach indicates value for a subject asset based on available market pricing for comparable assets. Trade receivables and payables and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented the estimated fair value of those items at the Horseshoe Baltimore acquisition date. Other personal property assets such as furniture, equipment, computer hardware, and fixtures were valued at the existing carrying values as they closely represented the estimated fair value of those items at the Horseshoe Baltimore acquisition date. The right of use asset and operating lease liability related to a ground lease for the site on which Horseshoe Baltimore is located was recorded at carrying value, which approximates fair value. Customer relationships are valued using an income approach, comparing the prospective cash flows with and without the customer relationships in place to estimate the fair value of the customer relationships, with the fair value assumed to be equal to the discounted cash flows of the business that would be lost if the customer relationships were not in place and needed to be replaced. We estimate the useful life of these customer relationships to be approximately seven years. The fair value of the gaming rights was determined using the excess earnings method, which is an income approach methodology that estimates the projected cash flows of the business attributable to the gaming license intangible asset, which is net of charges for the use of other identifiable assets of the business including working capital, fixed assets and other intangible assets. The acquired gaming rights are considered to have an indefinite life. The fair value of long-term debt has been calculated based on market quotes. For the period of August 26, 2021 through September 30, 2021, the operations of Horseshoe Baltimore generated net revenues of $18 million, and net income of $1 million. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information is presented to illustrate the estimated effects of the Horseshoe Baltimore consolidation as if it had occurred on January 1, 2020. The pro forma amounts included the historical operating results of the Company and Horseshoe Baltimore prior to the consolidation. The pro forma results include adjustments and consequential tax effects to reflect incremental amortization expense to be incurred based on preliminary fair values of the identifiable intangible assets acquired and adjustments to eliminate certain revenues and expenses which are considered intercompany activities. The unaudited pro forma financial information is not necessarily indicative of the financial results that would have occurred had the consolidation of Horseshoe Baltimore occurred as of the dates indicated, nor is it indicative of any future results. In addition, the unaudited pro forma financial information does not reflect the expected realization of any synergies or cost savings associated with the consolidation. Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Net revenues $ 2,718 $ 1,495 $ 7,102 $ 2,148 Net loss (265) (924) (611) (1,219) Net loss attributable to Caesars (268) (925) (617) (1,216) |
