Star to abandon merger plan if Crown broken up

The Star Entertainment Group plans to abandon its $12 billion merger proposal with Crown if Victorian royal Commissioner Ray Finkelstein finds that Crown Melbourne must be run as a standalone entity.

The spectre of the royal commission producing such a finding has played havoc with proposals from Star and from private equity player Blackstone to bid for Crown Resorts.

James Packer could be stuck without a Crown exit strategy.

Star is already looking at other options in the event that there is a break-up of Crown Resorts which also owns casinos in Perth and Sydney – the latter has yet to open given Crown has been found unsuitable to hold a licence in NSW at this stage.

Star is most likely to offer to acquire Barangaroo in Sydney – thus cementing its monopoly in NSW – and is believed to be running the numbers on Crown’s Perth casino.

It will not be the only player looking to take a position in a potential break up of Crown. Sources say that high profile Perth businessman and former Crown director, John Poynton, has begun work on forming a syndicate to buy out Crown Perth.

Finkelstein’s reading of an original agreement between Crown and the Victorian government is that Crown Melbourne must be managed out of Victoria for the benefit of Victorians and cannot undertake an expansion outside the state that would detract from Crown Melbourne’s revenue.

On face value, this suggests that Crown’s development of its Sydney casino would be in breach of that agreement. This reading of the agreement between casino and state may also render it difficult for Crown Melbourne to be structurally housed within a larger casino operator.

Legal sources suggest that modifications to the original deal between the Victorian government and Crown were made to allow Crown to buy the Burswood casino in Perth (now Crown Perth).

Even if Star were able to own Crown in Melbourne, it would lose many of the synergy benefits from the merger and would need to re-price its offer.

For private equity firms such as Blackstone, which has already produced an indicative offer for Crown Resorts, it would face the challenge of being deprived of controlling the casino’s strategy from its offshore head office. It would also be faced with a greater challenge in finding an exit strategy.

This leaves Crown shareholders, including James Packer, in the invidious position of being less able to exit his stake at a premium.

At worst if Finkelstein reads the agreement with the Victorian government in a strictly literal and legal sense, Crown may find itself takeover proof.

The intense scrutiny of Crown Melbourne’s operations and the likelihood that it will need to endure far greater regulatory oversight will also put pressure on its revenue and therefore its value.

A report from McGrathNicol, analysed at the royal commission last week, contained employee evidence that Crown’s new anti-money laundering controls were detrimental to revenue. According to the report Crown staff said two out of three patrons asked to fill out a source of funds declaration when betting over $25,000 declined to do so.

Meanwhile, the compliance costs of ensuring it remains fit to operate its licence shouldn’t be underestimated.

The potential that Crown Resorts could become takeover proof is a game changer for the company.

Australian banks went through this process after the financial services royal commission – the combined cost of remediation ran into the billions even before the cost of compensating customers were taken into account.

So, even if assuming ‘new Crown’ retains its licence, the company’s level of ongoing profitability will likely be reset.

Crown issued a profit warning last week on the back of temporary COVID-induced closures and the growing regulatory and compliance costs. And this puts at risk the hundreds of millions of dollars in dividends that Packer has traditionally been receiving from his 37 per cent stake.

The potential that Crown Resorts could become takeover proof is a game-changer for the company.

But it won’t hold a candle to the financial ramifications for Crown and Packer if the Melbourne casino is found unfit to hold a licence in Victoria.

Both these outcomes explain why over the past week alone, Crown Resorts’ share price has fallen by 6 per cent and is now sitting well below the indicative offers from Star and Blackstone.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.

Most Viewed in Business

From our partners

Source: Read Full Article