Based on the Bank of International Settlement’s (BIS) definition, a zombie firm is a publicly listed company that has been around for more than a decade with an earning ration, before taxes and interest, below one.
Put, such a firm pays a lot more in terms of interest compared to what it is earning. Nowadays, nobody minds them anymore. They are a common feature. You would be considered strange if you as much butt an eye at such a company. The reason is that interest rates are low, and money is quite cheap, meaning it is straightforward for a zombie company to secure an additional loan to keep it afloat. If there is money, then what else would you expect such a company to do?
In theory, a zombie company can quickly liquidate its assets as stated in calvinayre. They can also raise cash and go on to shrink themselves to a more manageable profile. That is akin to cutting away the rot and continuing to work with the good part that is left if there is any. Imagine how angry the stakeholders would be if a zombie firm took such as action when interest rates are meager, they have paid off their debt and continued to operate.
Based on data from the BIS, zombie firms account for about 12 percent of all the publicly trading firms. Under the S&P 500, they account for about 14 percent. That compares about 2 percent of firms in the 1980s. One such company is firm in the gaming industry happens to be Caesars. The firm has operated as a zombie for the past 12 years. You would think that the most recent court battle would have made things straight.
This past week, Eldorado Resorts Shareholders approved a deal that would give Eldorado the confidence to take on all the assets and problems of the Caesars. Eldorado is expected to pay about 7.2 billion, cash, and take on all of Caesar’s $11 billion liabilities and assets. Add this to Eldorado’s $3 billion, and the debt stands at $21 billion for a firm that will have a market cap of about $13 billion.
Of course, the management at Eldorado is expected to claim synergies. The CEO at Eldorado, Tom Reeg, claims $500 million worth of combined synergies, post-closing, in the firm’s latest meeting. If this is true, everyone will be out of zombie country before we know it, temporarily, though. Eldorado is expected to go in and clean up Caesars, which has close to 66000 unionized workers, mostly in the food and beverage department.
During the last conference call, Tom stated that they are focusing out on food and beverage operations. At Eldorado, only 18 percent of the worker are unionized, which is about 3400 workers. Presently, they have a manageable workforce. However, combine a workforce with that of Caesar, and things may get out of hand since most of them are in the food and beverage segment, an area that Eldorado feels has many inefficiencies.
The new merger may continue zombieing for the next few years. However, this depends on when next the credit wave will hit. Regardless, the next date to look out for is October of 2023, when Eldorado is expected to refinance $2 billion worth of principal debt.