The leading bidder for Australia’s Crown Resorts Ltd. has withdrawn from a proposed AU$9 billion (US$6.6 billion) buyout of its chief rival. Crown Resorts is the country’s biggest gaming operator. The Star Entertainment Group is No. 2. A union of the two would have created an AU$12 billion gaming giant.
According to Reuters, Star may yet consider a deal with the larger company, but it grew increasingly jittery during the ongoing inquiry into Crown’s operations in Victoria. That probe uncovered a list of wrongs that included money laundering, tax evasion and disregard for responsible gaming. The scandal caused Crown shares to decline, which added concern for Star.
Assisting counsel FC Adrian Finzanio said everywhere investigators looked, they “unearthed behavior that is deeply troubling and obviously ingrained.”
In the case of Crown Melbourne, he stated, the misconduct was “so flagrant and so well-publicized that no amount of restructuring can restore confidence in (Crown) as a fit and proper person to hold a license.”
He recommended that Crown’s Melbourne casino license be canceled, adding “that is not a submission made lightly.”
In a corresponding statement, Star said, “We continue to believe substantial benefits could be unlocked by a merger. However the uncertainty surrounding Crown is such that Star is unable to continue at the present time with its proposal in the form as announced on May 10, 2021.”
Star also expressed concern about “whether (Crown) retains the license to operate its Melbourne casino (and) the conditions under which its license is retained.” Star’s offer, made in May, included an all-stock merger with Crown.
Peter Cohen, former CEO and executive commissioner of the Victorian gaming regulator, said the odds that Crown Melbourne will keep its casino license is at “33 percent and shrinking.”
Star’s withdrawal is not welcome news for Crown, which earlier this year was deemed unfit to open its new VIP casino in Sydney, New South Wales (NSW). The investigation there included reports of unchecked money laundering at casinos in Melbourne and Western Australia (WA) and led to subsequent investigations in Victoria and WA. All the licenses are now in jeopardy.
Nathan Bell, portfolio manager of Intelligent Investor, which owns shares in both companies, said, “I think it was more the price Star wanted to back away from. Star may still be a bidder yet, as I’m sure the regulators would prefer a local operator to own our casino licenses.” Crown said in a statement it remains willing to engage with Star, and will consider any proposals.
Star’s wasn’t the only offer on the table—in April, Oaktree Capital Group offered to underwrite an AU$3 billion buyback of shares belonging to billionaire and former chairman James Packer, who holds 37 percent of Crown; in May, it raised that offer to $3.1 billion.
Also in May, Blackstone Capital made an all-cash AU $8.4 billion offer, rejected by Crown as too low.
The next move belongs to Star. According to Nasdaq.com, the company’s offer was Crown’s “main option to show regulators it could overhaul itself under new ownership.” The merger would have eased regulatory concerns about Packer’s influence over the board and its decision-making, and the firm’s lengthy history of noncompliance.
J.P. Morgan analyst Don Carducci told Asia Gaming Brief that Crown could lose its suitability to operate a casino in Victoria but still be allowed to continue to trade. And the Australian Financial Review reported that counsel has suggested that the Melbourne license cancellation be deferred up to 18 months, giving the company time to make amends and keep its staff employed.
Carducci believes the company will continue to operate but with conditions. “Stopping Crown from operating doesn’t really fix the issue,” he said, “and ripping up a license is not in the best interest of anyone.”
David Green of NewPage Consulting told AGB Crown may have its license temporarily suspended. “While there are substantial grounds for recommending that Crown Melbourne be stripped of its license, I think a more likely scenario is that the license will have significant conditions imposed upon it, in particular relating to the composition of the board and the company not violating any laws or regulatory directions.” A suspension could be accompanied by fines.
Also under discussion was Finanzio’s recommendation of a 5 percent shareholder cap to ensure that no single shareholder could wield “undue influence” on Crown’s operations. J.P. Morgan analysts said this would be unfair to Crown’s current investors, many of which own more than 5 percent and under 10 percent. Those investors would be forced to sell shares at a loss in order to meet the new cap.
“You need to be thinking about who we’re trying to punish here,” the analysts said. “The bad actors are not the 11,500 employees at Crown, it’s not the shareholders. It’s maybe 15 to 20 management staff, and the board. To introduce a 5 percent cap would have a broader implication for the market and ironically, on Australians.”
In related news, Crown’s new AU$2.2 billion (US$1.6 billion) property in Sydney probably won’t open until “well into 2022,” according to Green. The NSW regulator previously suggested that Crown Resorts could open its Barangaroo resort on Sydney’s waterfront before the end of October, providing it made “significant” progress to prove itself suitable for a license. Now, Green said, regulators in NSW will probably want to see what happens in Victoria.
So what does Crown need to make the grade before state regulators? “At-risk compensation arrangements for senior executives need a serious overhaul, to ensure that profit is not rated more importantly than compliance with the various laws,” Green said. “It needs a re-think of its risk profile and management, and an overhaul of its internal controls to ensure that the risk envelope is not violated. It needs a complete re-think of its approach to patron care/harm minimization. It also needs new board members who understand the gaming business and have the experience and commitment to asking the difficult questions of management.”
A July 20 op-ed piece in the Financial Review scolded Packer for his company’s troubles. It said Packer “will have no one but himself to blame if—as seems likely—his Crown Resorts is stripped of its lucrative Melbourne casino license.
The column was headlined: “How James Packer killed his golden-egg laying goose.”
