Plenty Going Down at Crown

A modest tick from the market for The Star Entertainment Group’s punt to buy casino rival Crown Resorts.

Star’s shares closed up 7.6% at $4.21 and touched a day’s high of $4.30.  Crown shares ended at $13, up7.2% and touched a day’s high of $13.32.

That put Crown’s share price well above the increased rice from US group, Blackstone of $12.35 (up from its original $11.85 offer) and knocked out Oaktree’s funny deal to help Crown finance a buyout of James Packer’s 37% for $3 billion or so.

The Star says that its proposed merger delivers a value of $14 a share for Crown investors – once it realises a (theoretical) $2 billion boost from cost synergies after the merger happens – it has to run the gauntlet of enormous probity challenges and royal commissions in Victoria and WAS and any follow up investigations before anything happens.

The Star’s offer has a cash alternative (capped at 25% of Crown’s issued share capital) at $12.50 per share. Crown says it’s weighing up both proposals but it’s clear from Crown’s share price that investors think Star has a chance, even though the cash component is small compared with the 100% cash (but lower, at this stage) price from Blackstone.

Macquarie analyst David Fabris had a near instant reaction on Monday. In a note he said the merger – with an exchange of 2.68 Star shares for each Crown share – implies a deal worth $13.60 per share for Crown investors, made up of $10.48 a share in scrip in the new company, and $3.12 in synergy benefits.

“There is further upside optionality in the merger through a potential sale and leaseback of the portfolio and a possible re-rating,” he said.

He claims a Star-Crown merger (something analysts have been running the numbers on for some time) makes sense strategically given the value created from synergies; a possible multiple rerating given it will be a larger and more diversified business; and the possible windfall from selling the combined group’s property portfolio and leasing it back.

Synergy benefits though can be a lot of hot air and paper. At Monday’s close the market valued Star ($3.21 billion) and Crown ($8.2 billion) at a combined $11.4 billion.

There’s also a new CEO at Crown – retiring Lendlease chief executive, Steve McCann who will take up his position once he is clears probity checks. In the current climate of the problems around Crown, that might take some time.

Competition clearance from the ACCC might be a concern but there are plenty of betting options out there – clubs and pubs in various states with poker machines, lotteries, wagering and online gambling of any type you want.

And then there is the closed borders because of Covid (and the rotten relations with China which will shut off that country as a source of punters when the borders re-open).

The deliberations of the royal commissions in Victoria and WA might be of greater concern, especially if they make findings similar to those of the Bergin inquiry in NSW which kicked off Crown’s woes on money laundering and other allegations, especially with big gamblers from Asia and especially China.

That inquiry’s findings have stopped Crown from opening its casino floors in the Barangaroo building in Sydney, and have made it hard for James Packer to remain a shareholder of Crown.

If Packer remains a shareholder, Crown will not get a licence to operate its Sydney casino and other states (and the royal commissions) will be hard pressed to make findings contrary to what the Bergin inquiry found.

All these deals and bids for Crown founder on the continuing presence of Packer, and will get traction and meaning if he sells his stake completely and his influence is removed from the casino company.

All these bids and deals are conditional on the probity checks being favourable – after the two royal commissions report and the NSW makes its mind up about the Crown licence in Sydney.

 

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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