Blackstone is edging towards completion of its takeover of Crown Resorts. But such is the animosity towards the casino group, not the deal, that roadblocks and hurdles keep appearing. There is a Material Adverse Changes clause in the Scheme Implementation Deed that allows Blackstone to terminate the deal.
Investment view
On balance, we expect the Blackstone takeover of CWN to complete. But the process is throwing up a laundry list of reasons for Blackstone to contemplate exercising its Material Adverse Changes clause that would allow it to back out, prior to the second/final Federal Court hearing date (yet to be set).
The clause states that if the aggregate impact reduces the value of CWN’s net assets by more than $750 million, it can terminate the Deed and avoid the $89 million break fee.
To be clear, the process is making positive progress towards completion with shareholders overwhelmingly approving the deal at the vote on 20 May 2022 and FIRB approvals secured shortly after. The various State regulatory approvals (WA, VIC, NSW) and Federal Court sign-off are the two major outstanding boxes to tick.
Since Blackstone revised its offer in January to $13.10 per share, CWN has been dealt a series of punitive events that in aggregate, could amount to somewhere near the $750 million trigger mark for the getout clause. These include:
- A gaming machine tax hike for Crown Melbourne
- Potential for mandatory carded play in Crown Melbourne as early as January 2023
- An $80 million fine issued by the new VIC regulator (VGCCC) for the China UnionPay breaches in 2012-16
- Potential for further VGCCC fines up to $100 million each relating to other findings of the Royal Commission such as harm minimisation and underpayment of taxes
- A sizeable AUSTRAC fine for multiple anti money laundering breaches, possibly within 6 months
An unknown element of the equation is how much of these negative factors has been factored into Blackstone’s offer? Only Blackstone knows the answer, but if the quantum is larger, or there are additional negative factors not accounted for, then there is a chance the MAC clause could be utilised.
It is possible that Blackstone is attempting to stall the final Federal Court hearing to allow as much of the bad news as possible to surface.
If Blackstone did invoke the Material Adverse Clause and terminated the deal, we would expect the CWN share price to fall significantly to around $8 per share.
In contrast, shareholders only have a small amount of upside to the $13.10 per share offer if the deal does complete.
The balance of risks suggests shareholders should sell now.
Risks to investment view
The Blackstone transaction is subject to regulatory approval from State governments and Federal Court approval.
Recommendation
We have lowered our recommendation to Sell from Hold.
