Running the numbers: Casinos could shine with a Star in the Crown

Crown Resorts has a ten-week window to work on a plan B in the event it loses its NSW gaming licence or James Packer is found unsuitable to be an associate.

And no one would be spending more time gaming out the possibilities than NSW rival casino operator, The Star.

Crown was set to open the Barangaroo Casino in mid-December.
Crown was set to open the Barangaroo Casino in mid-December.
Credit:Wolter Peeters

In 2019, when Packer was shopping his then 47 per cent stake in Crown around to numerous casino players (including the consideration of a proposal to sell 20 per cent to junket operator Suncity), The Star’s interest was said to have been sounded out by investment banks.

Back then Packer was looking for more than $14 a share (the aborted deal with Wynn Resorts valued Crown shares at $14.75). History suggests Star said no dice.


Today, Packer’s future ownership of a controlling stake in Crown is under a cloud and the casino group’s share price sits around $9.50.

The conditions are now more ripe for the consideration of a merger. The Star has given no indication that it is running the numbers and, if it is, would need to wait to see what the Crown inquiry yields when a report containing recommendations is handed down by Commissioner Patricia Bergin in February.

It explains why two high-profile casino analysts have this week been crunching the numbers on a merger of Crown and Star. And both have concluded that it makes sense from a financial perspective.

When the NSW gaming regulator set up a commission of inquiry into Crown, the prospect of any meaningful repercussions for the casino operator were considered remote. When hearings began in January analysts were factoring in little or no changes to the value of the company or any potential costs associated with a stricter regulatory framework.

So much has changed, particularly over the past couple of months.

Counsel assisting the inquiry have recommended Crown is not suitable to hold a licence, that James Packer is not fit to be associated with a casino licence in NSW and the state’s regulator has banned the December opening of Crown’s Sydney casino, waiting instead for Bergin’s findings in February.

Disqualification from holding a licence still looks like a radical option – albeit less far-fetched than it appeared a month ago. However, a finding by Bergin that Crown is currently unfit, but could pass muster if changes were made seems a decent bet.

The possibility that Packer will need to sell down his 36 per cent stake must be considered live.

There is also a real chance that some directors and some senior executives will not survive the test of being a close associate of a casino licensee.

Arguably, teamed with some more regulatory controls, a board, management and ownership clean-out would take Crown back to its bones and remove the corporate DNA that has compromised its governance, risk and anti-money laundering processes.

Based on Macquarie’s analysis of a nil premium scrip merger, Packer would hold 23 per cent of the merged Star-Crown group. Under that scenario he may still need to lighten his stake, perhaps to 10 per cent.

Such a deal would create a national casino network in the four largest states.

The estimated $150 million in synergy benefits and the attendant estimated lift in earnings per share of between 5 per cent and 9 per cent that Macquarie says the deal will bring, must hold some appeal for both sets of shareholders.

“The risks facing Crown, and to a lesser degree Star, warrant serious consideration of a merger of the two companies,” says Sacha Krien from Evans and Partners.

He notes that Crown faces numerous issues, including the potential loss of the Sydney casino licence or new restrictions on that licence, reviews of its Melbourne and Perth licences, a Sydney casino limited in its earnings capacity (assuming the licence is retained) and the possibility of a forced sell-down by 36.8 per cent-majority-shareholder CPH.

The Star, Krien suggests, faces a new competitor for VIP/premium tables in the Sydney market and restrictions on VIP junkets in the wake of the Crown inquiry.

Krien and Macquarie’s David Fabris estimate an increase in the value of the merged group of 33 per cent and 30 per cent respectively.

A merger would also overcome the more immediate problem for Crown: losing senior management and a number of board members in the event that they are found unfit to be associated with a casino licensee.

A merger would allow Star’s governance team to manage the merged entity.

It will also be interesting to see if Crown’s other large shareholders start making their views heard.

Blackstone acquired a 10 per cent stake in Crown earlier this year at $8.15 and has since applied to regulators to increase its holding.

Several large shareholders voted against the re-election of directors and delivered the company a first strike against its remuneration report at last month’s annual meeting.

At the at times hostile meeting, shareholders made their displeasure felt about the failings of the board and management.

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