Simple really. The stock is too cheap, Packer is keen to buy to privatise, and to do that he needs a) a willing partner (Oaktree would seem the obvious party), and b) to step down from the board, which he has now done.
The press today seem to suggest that the board of CWN were taken by surprise, as was JP, since he was due to resign at the same time as announcing the bid, but things happened a few days earlier than expected. If that is true, then point a) from the paragraph above would seem to have been completed aswell....
The market reaction to James Packer's resignation as a director of Crown Resorts says it all – ordinary shares up and hybrid securities down.
The equity capital markets are welcoming a move which gives the strongest indication yet that Packer will privatise his global gaming business. But the fixed interest markets are not so enthusiastic.
The exchange traded prices of about $1.1 billion in Crown subordinated notes, which are pseudo debt and rank ahead of equity, were hit on Monday as analysts digested the implications of Packer taking his company private.
The subordinated notes plunged about 6 per cent, which was the biggest one day fall since they were issued. Crown's ordinary shares are up 13 per cent since a leak last week that privatisation of Crown was on the table, possibly in partnership with a large private equity firm.
From the moment the inkling of the deal leaked, Packer and the Crown board have been playing catch-up.
Packer's empire, both the private and public segments, usually manages its business with extraordinary efficiency including masterful control of the messaging.
That has not been the case with this privatisation proposal.
In the first instance, the board of Crown was seen to be out of the loop because its response to a stock exchange query was to simply republish a note from Packer's private company, Consolidated Press Holdings.
This made the board, with its array of high profile independent directors, look like a mail box for Packer.
Then to add insult to injury Packer decide to vent his frustrations about the slow pace of the approval process for his $2 billion Sydney casino on the harbour at Barangaroo.
In an interview with The Australian Financial Review Packer said Crown's Barangaroo casino was "miles behind our opening date schedule".
At least one shareholder in Crown saw that as an attempt to talk down the stock. But the upward momentum in the share price continued on Monday thanks to Packer's resignation from the Crown board. There is a sneaking suspicion among close watchers of the Packer empire that the original plan was for Crown and CPH to make a joint announcement about all options being on the table while at the same time announcing Packer's resignation from the board.
But all that fell apart with the leaking of CPH's market discussions.
Packer's ham-fisted handling of this perfectly reasonable proposition has exposed the inherent conflict between debt and equity holders.
The debt market view was summed up by analysts at Bell Potter who warned clients that privatisation of Crown would not be good for holders of Crown notes which traded under the tickers CWNHA and CWNHB.
"While the expectation is that investment grade corporates will redeem ASX listed debt and hybrid securities at their first call date, the potential for an investment grade issuer such as Crown to become an unrated private company materially increases the risk that CWNHA and CWNHB will not be redeemed at their first call date," the Bell Potter analysts said.
"If a privatised Crown adopts a capital structure more aligned to returns required by private equity owners, there is an increasing risk CWNHA and CWNHB may not be redeemed until their maturity date at year 60 (CWNHA September 2072, CWNHB April 2075).
"In recent years, Crown has been placing less importance on maintaining an investment grade credit rating.
"At its FY13 result on 23 August 2013, Crown stated in its presentation pack: 'Crown's capital management strategy targets an efficient capital structure with sufficient liquidity and flexibility to support its strategy and maintain its current investment grade credit ratings'.
"Curiously, Crown has been silent on its desire to remain investment grade in subsequent results. A reduction in equity credit for CWNHA and CWNHB at the first call date becomes largely irrelevant if Crown is unrated."
A fund manager in the fixed interest market said the Bell Potter note gave absolutely no credit to the ability and willingness of Crown's independent directors to protect the interests of note holders.
The sort of knee-jerk negative reaction in the fixed interest markets to Packer's possible privatisation of Crown is not dissimilar to the reaction to another billionaire who is trying to improve the lot of ordinary shareholders.
Owners of the floating rate perpetual securities issued by Seven Group Holdings called TELYS4 are watching in astonishment as the price drops and the yield soars.
The gross running yield on these securities is now almost 12 per cent despite the fact that Seven Group has provided public commitments in relation to its dividends.
The fall in the price of the Seven perpetual securities coincides with a buyback that is lifting the Stokes family holding in Seven under the "creep" takeover rules.
There is obviously scepticism in fixed interest markets that the interests of perpetual securities holders will be protected in the event of a corporate event involving the ordinary shares.
But it has to be said that concern is probably ill-founded given that there are many levels of protection for perpetual securities owners in the legal framework laid out in a scheme booklet issued with the securities.
Chanticleer believes independent directors of Seven Group can be relied upon to protect the interests of those holding Seven's perpetual securities given the company's history with subordinated notes.
