Echo Entertainment the 'cheapest casino stock in the world'VGI...

Echo Entertainment the 'cheapest casino stock in the world'

VGI Partners, a $600 million hedge fund, has acquired a stake of up to 3 per cent in Echo Entertainment, the owner of The Star casino in Sydney, and is pushing for the casino operator's new management to restore value to what it calls the "cheapest casino stock in the developed world".

In a presentation to investors obtained by The Australian Financial Review, the fund, with offices in Sydney and New York, said that "as one of its larger shareholders" it would "liaise closely with management and the board to ensure equity value is restored".

The investor push to address Echo's perceived mismanagement may mark the start of an era of greater shareholder activism in Australia.

It follows a global trend that has shaken the corporate boards of some of the world's largest companies, such as Apple, Sony, and Procter & Gamble.

VGI, founded in 2008 by former Caledonia executive Rob Luciano, outlined its case for building a stake in Echo that would make it among the largest shareholders, via the presentation to the fund's investors.

The fund cited recent management changes as a potential catalyst to address the poor performance of its "monopoly" casinos in Sydney and Queensland.

"VGI has met with Echo senior management a number of times already and now as one of Echo's larger shareholders we will continue to liaise closely with management and the board to ensure that equity value is restored," VGI said in a letter to investors.

"We were pleased to see a recent change of management, which we believe increases the probability of an earnings recovery and wiser capital allocation."

In February 2014, Echo's chief executive John Redmond was replaced by chief financial officer Matt Bekier after one year in the position.

VGI would not comment on its investment in Echo, but a spokesman said it was not an "activist" fund.
"We are a high conviction equity manager and when appropriate, we work with management closely to ensure shareholder value is maximised," a VGI spokesman said.
Echo Entertainment said it does not comment on individual shareholder positions.

'Cheapest casino stock in the developed world'

The presentation showed that Echo is the cheapest casino stock in the developed word, with a valuation of six times one year forward enterprise value to earnings before interest tax, depreciation and amortisation multiples.
The global median average is 12.6 times, while the Australian median multiple is 9.2 times, according to the fund's presentation.

Echo has under-performed the ASX 200 Index by almost 60 per cent since it was spun out of Tabcorp in July 2011.

VGI calculated that $2.5 billion had been invested in The Star since 1994, an amount that exceeds the entire $2.03 billion market capitalisation of the company. The fund believed Echo's share price value to be $3.58, based on "sum of the parts" valuations using ­current earnings, and around $4.07 if its earnings recovered. Echo's current share price is $2.42.

In May 2013, VGI took a large stake in 270-year-old auctioneering firm Sotheby's. It engaged privately with the company, proposing a sale of its real estate assets.

Sotheby's, which is listed on the New York Stock Exchange, has since become the focus of aggressive activist interest, which intensified this week when Dan Loeb of $US14 billion ($15.3 billion) activist fund Third Point launched a proxy fight to secure more board seats.


Read more: http://www.smh.com.au/business/the-economy/echo-entertainment-the-cheapest-casino-stock-in-the-world-20140320-353lv.html#ixzz2wXBjof4n