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Crown wins - but it's not the jackpot
Date July 4, 2013 - 4:04PM 152 reading now (151) Read later Eli Greenblat

Investors have been taught a salutary lesson that when it comes to casinos never bet against James Packer.

The decision by the New South Wales government this afternoon to wave through Crown’s proposed $1.5 billion luxury casino and hotel facility at Barangaroo to stage 3 approval should help support the company’s share price, while rival Echo Group which now stands to lose its casino monopoly should see its stock fall sharply.

Shares in Crown and Echo, owner of Sydney’s only casino at Star City, were placed in a trading halt earlier this afternoon as the government prepared to announce the recommendations of the independent steering committee chaired by former CBA boss and ex-Future Fund chairman David Murray.

James Packer’s plans for a $1.5 billion hotel and gambling resort at Barangaroo received NSW government backing. Click for more photos
Crown Sydney Hotel Resort
James Packer’s plans for a $1.5 billion hotel and gambling resort at Barangaroo received NSW government backing.

James Packer’s plans for a $1.5 billion hotel and gambling resort at Barangaroo received NSW government backing. NSW Premier Barry O’Farrell said the proposal for Crown's hotel and gambling resort at Barangaroo could proceed to "stage three" of the assessment. The announcement is subject to final approval by the state government, but effectively ends months of warring between Crown and Echo. Mr O’Farrell said state cabinet had decided the bid by Mr Packer’s company Crown Limited was superior to the one made by Echo. It is expected legislation will be needed to allow Crown to run its casino, which will be geared towards attracting high rollers from Asia. Entry to the VIP room would be subject to a 24-hour cooling-off period for anyone who can’t demonstrate a track record of high-roller gambling.
But the market had already made its own bet as to the likely outcome of the government decision on the state’s casino monopoly in 2020. Shares in Mr Packer’s Crown were up 26 cents, or 2.2 per cent, to $12.21 in morning trade before the halt stopped orders, while Echo stock had fallen 13 cents, or 4.3 per cent, to $2.91.

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Analysts warned this afternoon the stage 3 approval win by Mr Packer - which is highly likely to lead to a full approval for his casino development - wouldn’t necessarily cause a huge rally in Crown stock, and that likewise Echo shares shouldn’t plummet too far either.

James Packer said 'Crown Sydney is a once-in-a-lifetime project for our company'.
James Packer said 'Crown Sydney is a once-in-a-lifetime project for our company'. Photo: Jason South
Credit Suisse analyst Larry Gandler said he had a valuation of $2.60 to $2.90 on Echo shares if Mr Packer’s casino and development at Barangaroo went ahead as planned.

Mr Gandler said before the announcement and trading halt in Echo shares today, the market seemed to be reflecting in its share price a 50 per cent reduction in VIP turnover in 2020 and a 20 per cent reduction in private gaming room revenue as the new Crown in Sydney opened for business and started to poach customers.

‘‘It’s broadly neutral for Crown,’’ Mr Gandler added, ‘‘but it also opens up strategic options for growing their overall VIP gambling business but they are spending $1.5 billion to do it.’’

Goldman Sachs analyst Adam Alexander of said it was still too early in the process to forecast the exact impact on both company’s valuations.

‘‘Until we get more detail, I don’t think there will be a lot in terms of net present value initially for Crown, you have to see what the final stage 3 binding offer is before you can nail that down.

‘‘But at least it opens the door and they can work out a proposal from here.’’

Packer delighted

Mr Packer, Crown's chairman, said in a statement this afternoon that he was delighted that the company's Crown Sydney hotel resort had been approved to progress to the next stage of the unsolicited proposal process.

“This decision follows months of hard work by Crown to develop its proposal for an iconic six-star hotel resort on Sydney Harbour at Barangaroo South,'' Mr Packer said. “The Crown proposal will give Sydney a landmark hotel it can be proud of. Barangaroo South represents a spectacular opportunity to showcase an iconic six-star hotel resort which will be located on the harbour’s best available site.”

Mr Packer said Sydney was one of the world's great cities and it deserved one of the world's great hotels.

''I want this building to be instantly recognisable around the world and feature on postcards and memorabilia promoting Sydney. That’s how you attract international tourists, create jobs and put Sydney on the map.

“Crown has the track record and experience to deliver something very special for Sydneysiders and visitors from interstate and overseas. No other organisation can deliver this unique project.”

Echo disappointed

Echo chairman John O'Neill said the company was disappointed that the NSW government did not ''share its vision'' for its redevelopment plans for the Star City casino complex and the further development of the Pyrmont and Darling Harbour precinct.

He said notwithstanding the win by Mr Packer, Echo remained committed to maximising shareholder value at its current casino complex which still had an 80 year licence including an exclusive monopoly through to November 2019.

''The Star is Echo's flagship property and we are here for at least another 80 years. Echo remains conservatively geared and in the absence of its unsolicited proposal proceeding, has the funding and operational flexibility to pursue a range of growth avenues for the business.''

Return 'difficult' without pokies

Goldman Sachs's Mr Alexander said he believed Crown’s stated target of a 15 per cent return from its billion dollar plus development of a new luxury casino and hotel could be difficult to achieve especially as it was likely the new casino would be limited in the types of gambling games it could offer.

‘‘Their target rate of return is 15 per cent, I think it will be difficult to get that without slots (pokies machines) and a limited amount of tables but at least they have the ability to tap into that premium mass market.’’

He said for Echo’s valuation it would greatly depend on how much of their business is eaten away by Crown when their exclusive licence ends in 7 years.

‘‘For Echo its in 2020, how much of their play do they lose to Crown, there will be some impact but it’s a long dated impact on their DCF and whether they invest now in redeveloping their own casino or not will change that value.

‘‘You would probably think they wouldn’t invest as aggressively as they planned to in redoing Star City casino.’'



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