odds on crown bid for echo improve

April 12, 2013, 2:25 PM.
Odds on Crown Bid for Echo Improve, Says JPMorgan.
Deal Journal Australia HOME PAGE ».


By Robb M. Stewart
It may be time for Crown Ltd. CWN.AU +0.16%to double down.

The steady rise in its shares for the better part of the past year has increased the value of scrip in any potential bid for rival Echo Entertainment Group Ltd. EGP.AU -0.54%
Shares in Crown–controlled by billionaire James Packer–have risen more than 50% since the beginning of June, lifting its market value to almost 9.3 billion Australian dollars (US$9.8 billion). In the same period, Echo’s shares have fallen almost 13% and its market capitalization is now about A$3 billion.


Bloomberg NewsJP Morgan JPM +0.12%analysts Matthew Ryan and William Eu Nam Loh think a bid would boost Crown’s earnings within two years. That’s a big swing from how a deal might have looked during 2012.

Crown lifted its stake in Echo to 10% early last year, building on a 4.9% interest picked up around the time that Echo was spun off from Tabcorp TAH.AU +0.30%. It has applied to authorities in Australia’s News South Wales and Queensland states to further increase this, although not beyond 25% without first seeking regulatory approval.

The past 18 months have been eventful for Echo. Its chief executive and chairman departed within eight months of each other. There was also a profit downgrade and subsequent capital raising.

Echo’s shares have fallen 16% since reaching a peak in May to A$3.67 now.

In a research report released this week, JP Morgan’s Sydney analysts suggest a bid for Echo could fetch between A$4.51 and A$5.03 a share, representing a 36% premium at the top end to its last close. That’s based on 10-11 times forward earnings before interest, tax, depreciation and amortization, or Ebitda, which the analysts say is broadly in line with the average of the last five Australian casino transactions.

Based on their assumptions, they calculate a deal would weigh on earnings per share by 2% in fiscal 2013, be neutral the following year and then 2% accretive in fiscal 2015. When J.P.Morgan last did this analysis, it estimated a deal would dilute earnings by 7%, 4% and 3% respectively each year.

Beyond the calculations, a takeover would also settle a contest that is brewing between the two companies in Sydney, where Echo has the sole right to operate a casino.

Echo has applied to the state government to extend its exclusive license beyond 2019, while Crown is seeking approval to add a casino for high-rollers to its proposed “six-star” hotel development in the city. The state government has indicated only one proposal will advance to the next stage of the review process.

Commonwealth Bank of Australia sa CBA.AU +0.15%ys a successful application by Echo puts the company “back in play” given Crown has clear ambitions in Sydney.

While a win for Crown in securing permission for a VIP room at its Sydney hotel has obvious risks for Echo’s existing The Star casino, the bank says it’s also a gamble by Crown. The company may be betting its application can be extended to licenses for gambling machines and tables.

The stakes are high for the companies. Commonwealth Bank is currently neutral on both shares, while JP Morgan recommends being overweight Crown

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