The chips are down for The Star
Things were looking good for Star Entertainment Group in May 2021. So good then chairman John O’Neill confidently proposed a $12 billion merger to take over its biggest rival Crown Resorts. Crown was in the midst of a very public take down after extensive money-laundering and counterterrorism failings.
Two damning state inquiries, four shareholder class actions, looming multimillion-dollar fines and two revoked state casino licences later, the outlook could not be bleaker for the once-dubbed “cleanskin” casino or its former chairman who’s fighting millions of dollars in personal penalties.
In the past six months, The Star’s formerly enviable share price has shed more than 65 per cent in value to $1.47 and its market capitalisation has plummeted from $4 billion in 2021 to $1.4 billion this week.
Newly minted chief executive and former Tyro Payments boss Robbie Cooke has so managed to grin and bear his way through each regulatory hit. His first day last October coincided with the freshly emboldened NSW regulator’s decision to strip its Sydney casino licence, issue a record fine of $100 million and place Wexted Advisor’s Nicholas Weeks as independent manager. He joked at the time it was a “weird” way to be inducted into leading the country’s second-biggest casino group.
The penalties were announced by the NSW Independent Casino Commission head Philip Crawford following a lengthy inquiry by Adam Bell SC, which in September found The Star unfit to hold its licence. The public inquiry was launched after a 2021 investigation by this masthead alleged The Star, like Crown, had enabled suspected money laundering, organised crime, large-scale fraud and foreign interference in its Australian casinos. Crawford said the regulator had come close to closing the casino’s doors entirely, and would have done so if not for the 4500 Star Sydney employees.
Crawford did not express much hope for The Star at the time. He was scathing about the “breathtaking arrogance” exhibited by The Star’s former leaders – who are now potentially facing multi-million dollar penalties from the Australian Securities and Investment Commission – and accused the organisation of treating the regulator with disdain and as an “impediment to be worked around”.
He said the company had for years engaged in a “conspiracy to make sure that they got away with and did things that they knew were wrong, and they threw their moral compass out the window”.
All eyes will be on The Star’s half-year results next Thursday to see whether the cost of remediation, which includes converting to cashless gaming by 2024 and retrofitting its anti-money laundering and counterterrorism technology, is too great to keep the Sydney casino afloat. The group declined to comment for this article due to market sensitivities ahead of the results.
Booming Crown and the mounting cost of remediation
The Star watched as the revelations of extensive criminality poured out of the Bergin inquiry into Crown Resorts in 2021. Despite having front-row seats, the Bell inquiry casino giant did not pause to examine its own operations and has since been severely punished.
While Crown was offered a lifeline in the form of private equity giant Blackstone, which took the group private for $8.9 billion and ended billionaire James Packer’s controversial reign, The Star is at the mercy of the market and its listed responsibilities.
The Star has come up with a plan to improve on instruction from the NSW regulator, with 130 milestones to be implemented over the next two years. It aims to overhaul all failing aspects of the company: from its technology to culture. The group expects remediation to cost between $35 million and $45 million this year, with half of this amount to be recurring.
It’s also been slapped with multiple fines. In addition to its legal costs during the Bell inquiry and the NSW regulator’s $100 million penalty, it awaits a decision from the financial watchdog, the Australian Transaction Reports and Analysis Centre on the quantum of its penalty for contravening the Anti-Money Laundering Counterterrorism Financing Act. Each contravention of the Act attracts a maximum penalty of $22.2 million.
Crown budgeted more than $600 million to pay for similar penalties. The biggest fine in corporate history was issued by AUSTRAC to Westpac in 2019, following similar anti-money laundering breaches that saw the bank pay $1.3 billion, just $1 million less than The Star’s entire market capitalisation.
After a stalled opening and extensive reputation damage, Crown’s $2.2 billion Barangaroo casino is now heaving with people. Crown, where the average price of a room in its hotel is around $1000 to $1100 per night, estimates its hotels and restaurants are at 98 per cent capacity while its Pyrmont rival continues to suffer from the lack of Chinese tourism that propped up its operations for so long.
Enter: the NSW treasurer’s poker machine tax proposal
On Monday, The Star issued a dire market outlook ahead of next week’s results, which sent the share price plummeting by more than 30 per cent to $1.28. In it, the group flagged it faces a write-down of between $400 million to $1.6 billion, plus millions of dollars in remediation and transformation costs, and is considering an “urgent review” of its Sydney operations and assets as a result. The final figure is only expected to total $1.6 billion if the NSW government proceeds with a proposed tax hike on casino table games and poker machine earnings.
Although the outlook revealed its Queensland operations were soaring with record profits in the Gold Coast and increased revenue from Treasury Brisbane, Sydney’s revenue fell by 13.5 per cent, bringing the overall group revenue down by 1 per cent on pre-COVID levels this half.
Cooper Investors – which previously held an 8 per cent holding in the company – sold close to 20 million shares following the announcement and is no longer a substantial shareholder in Star Entertainment.
Despite the extent of the market drop shocking some, uncertainty about the future profitability of the Sydney casino has been brewing since just before Christmas, when the NSW Treasurer Matt Kean announced a proposal to increase the amount of tax on casino table games and poker machines.
Under the proposed increase, poker machines in casinos would attract a top tax rate of 60.67 per cent. It is expected to take effect from July. Kean said the tax would generate $364 million over the next three years to be invested into areas affected by natural disasters, and would override existing tax arrangements between the state government and casino groups Star Entertainment and Crown Resorts.
The Star has exclusive rights to operate poker machines in casinos in NSW, but owns just 1.8 per cent of the state’s machines – with about 75 per cent in the state’s clubs and the remainder in pubs. Some shareholders, analysts and industry executives have expressed concern the sudden and quixotic nature of the proposal raises sovereign risk issues and may affect future investments in NSW.
The Star’s former deal with the NSW government, a 20-year deal negotiated under Premier Dominic Perrottet when he was treasurer in 2020, saw the group’s poker-machine profits taxed at 32 per cent until 2025, 33 per cent until 2027 and 34 per cent from 2028 to 2041. That deal meant The Star was taxed 5.49 per cent less on its machines than pubs and clubs.
Kean said in December the new proposal was designed to bring NSW in line with Victoria’s poker machine sliding-scale taxation system, a claim rejected by some critics who argue the poker machine tax scale imposed on Victoria’s Crown casino is the same as the rate imposed on the state’s clubs and pubs.
Some critics have pointed out the treasurer’s proposal may well threaten the very reason the casino was allowed to keep open its doors in September: jobs.
The United Workers Union was quick to slam the “ill-thought-out” tax, accusing Kean of not thinking through the risk to The Star’s employees.
Kean waved away criticism the government had gone too far in December, and argued the least the group could do after losing its social licence was to make a “small contribution” to floods victims.
But the government appears to have changed its tune on this issue. A Kean spokesperson told this masthead on Friday, the extent of The Star’s financial stress was not clear when the proposal was raised in December and his department has been engaging in discussions with the group.
“The Star faces financial difficulties due to the fines and loss of revenue caused by their historic, systemic, severe regulatory failings and illegal activities that were not visible to the market,” the spokesperson said.
“These severe regulatory failings and illegal activities have put the livelihoods of The Star’s employees at risk, so the NSW government will continue working with The Star to ensure past failings do not place further pressure on The Star’s workers.”
Brokers at global investment bank Credit Suisse warned earlier this week if The Star’s cash levels continued to drop further in the next financial year it would put pressure on the company’s debt responsibilities, and added the business could raise $200 million to lower the risk.
The Queensland government has ruled out following in the footsteps of Victoria and NSW and increasing the tax on casino poker machines. One shareholder, who spoke on the condition of anonymity, said the NSW government should work with the group to negotiate a tax outcome that doesn’t so drastically affect its bottom line. They also suggested the government repurpose some of the casino’s land in Pyrmont as an alternative way to increase state revenue.
“It’s reasonable to expect shareholders in The Star to absorb the cost of regulatory fines, we will wear that punishment for the misdeeds of the group, but to be punished through a surprise taxation change to a 20-year agreement is not the way to do it.”
What’s next for Star Sydney?
No one’s sure what’s in store for Star Sydney. While some shareholders are pushing for the government to reduce the scale of the tax proposal, others are wondering about the possibility of a takeover, fuelled by the November appointment of Crown’s former legal chief Betty Ivanoff to the same job at Star.
Ivanoff’s 20-year career spans many famous acquisitions including Coca-Cola and Crown itself.
Meanwhile, the group hopes its swathe of new leaders – including Ivanoff, Star Sydney chief Scott Wharton, and chief risk officer Scott Saunders – combined with its 130 remediation milestones and committed contrition will serve to restore enough trust to regain its two state casino licences and restore a semblance of normality across operations.
Even if the NSW government tax proposal does not come into effect, The Star still needs to address its waning market share, navigate a multi-million dollar transformation of its entire operations, regain its two state casino licences, front multiple shareholder class actions, refinance its Queens Wharf project in Brisbane, and pay its fines. With Crown able to navigate some of these challenges under the radar, there’s no clear path to redemption.
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Source: Thanks smh.com