A lot of gaming analysts saw this one coming. Last week, Australia’s Star Entertainment Group made a play for its chief market rival, Crown Resorts.
On May 10, Star proposed an all-stock buyout of Crown that it valued at AU$9 billion (US$7 billion). With its bid, Star is going up against global investment firm Blackstone Group, which recently upped its own Crown bid to AU$8.4 billion, and Oaktree Capital Group, which has proposed to bankroll an AU$3 billion buyback of Crown founder James Packer’s 37 percent stake.
Other bidders could also be circling according to the U.K. Guardian newspaper, including Apollo Investment and Hong Kong-listed CC Land Holdings, a real-estate development firm 70 percent owned by CK Cheung.
In a filing to the Australian Stock Exchange, Star ran down a number of reasons the merger makes sense. Among them:
- It would create a national tourism and entertainment leader with a world-class portfolio of integrated resorts with enhanced scale and geographic earnings diversification
- It is expected to deliver between $150 million to $200 million of cost synergies per annum with an estimated net value of $2 billion
- It could unlock significant value from a sale and leaseback of the enlarged property portfolio
- It would support an enhanced range of products and experiences for domestic and international guests across the portfolio of integrated resorts
In short, Star asserted, the deal “would provide access to exciting growth opportunities only available through the merger across marketing and events, digital and technology initiatives, investment in online capabilities and optimization of a combined loyalty program to deliver enhanced value for members.”
The Wall Street Journal broke down the deal as follows: Star’s offer assesses Crown stock at more than AU$14 per share, equivalent to US$11. Star is offering 2.68 of its own shares in exchange for every Crown share as well as a cash option of AU$12.50 per share for up to 25 percent of Crown’s shares on issue.
Blackstone, which owns the Cosmopolitan in Las Vegas, is now offering AU$12.35 per share for Crown, up from AU$11.85. Blackstone already owns nearly 10 percent of Crown, making it the second biggest shareholder after Packer.
Tarnished Crown
Crown has been the subject of intense scrutiny over the past few years, first by investigative media, then by state gaming regulators, due to allegations of money laundering and links to organized crime elements. In October 2016, 19 Crown staffers were arrested in mainland China and jailed in Shanghai for illegally promoting casino gambling. According to the Sydney Morning Herald, the arrests “sent shockwaves through the ASX-listed casino giant.” It demonstrated Crown’s heedlessness of Chinese law and sparked a class-action suit by shareholders looking to recoup hundreds of millions lost in a share price collapse.
In February, the heat got even hotter with the release of the Bergin Report, commissioned by regulators in New South Wales (NSW) to look at Crown’s suitability to open a new multibillion-dollar casino overlooking the Sydney waterfront.
The report, a damning summation of noncompliance at Crown casinos in Perth and Melbourne, cost Crown the right to open that casino, at least for now (it was permitted to open hotel and food and beverage outlets at the property). The report caused an exodus of board members and forced out CEO Ken Barton. It also prompted authorities in Western Australia (WA) and Victoria to start their own royal commissions to assess Crown’s probity.
According to Reuters, Star said it would pursue a sale and leaseback of the companies’ combined property portfolio, including valuable waterfront land, generating “significant value.”
Star’s proposal “has the synergies, and then the sale-and-leaseback provides the firepower to do buybacks to realize full value for both sets of shareholders,” John Ayoub, portfolio manager of Wilson Asset Management which has shares in both, told the news agency.
The potential merger would increase the pressure for casino operators to sever their relationships with junket companies, which bring high rollers to Australian casinos and have been linked to Chinese triads. Like Crown, Star has done business with SunCity, a junket named in the Bergin Report as having likely ties to organized crime. In February, Star CEO Matt Bekier saw the handwriting on the wall, and told the Australian, “The junket business is dead. It’s not going to come back.”
Bekier said there was a small overlap of the two companies’ businesses, which would compete only in Sydney once Crown was allowed to run its casino. “We would position the brands at the ends of the consumer spectrum, rather than letting both brands drift into the center,” Bekier said.
MSN reported that the proposed merger with Crown would create a gaming giant that controls casinos in most of Australia’s capital cities, and also “a juggernaut of political influence.”
An Out for Packer
It’s long been suggested that political influence let Crown evade closer scrutiny until recently. Over the last decade, under the aegis of billionaire Packer (l.), the company has contributed about $1.2 million to the WA and Victorian Labor and Liberal parties.
According to Bloomberg, competing offers give Packer several ways to make a graceful exit.
“The Blackstone bid would give him a potential clean break. Star’s proposal offers the billionaire the chance to swap at least some of his 37 percent stake in Crown for a smaller share in the merged entity.” Packer has admitted a lengthy battle with depression.
The choice facing Crown’s board, Bloomberg suggested, is weighing “the instant reward of Blackstone’s cash offer with the potential long-term benefits of a union with Star.”
