Blackstone, which already owns 9.99% of CWN, has made a third bid for the rest of Crown Resorts. The bid is craftily timed with the WA Royal Commission yet to be completed, and the Victorian Royal Commission findings still fresh off the judicial bench.
CWN retained its Victorian gaming licence by the skin of its teeth, saved only by the cancellation option not being in the best interests of the community. Instead, CWN will be monitored by a ‘Special Manager’ over the next two years who will have extraordinary powers to probe every minute aspect of the business and could yet recommend the licence be revoked.
That is unlikely to happen if CWN’s new Board and mostly new management continue their stringent bleaching of the company’s culture and processes. New chairman Dr Ziggy Switkowski believes fixing CWN is “not rocket science” but the regulatory shadow will remain in the background as a risk factor.
In a 1-2-3 punch combination, CWN has been badly exposed for its disgraceful corporate behaviour by the NSW, Victorian and West Australian inquiries. The incomplete WA Royal Commission is unlikely to uncover any further wrong-doings and therefore likely to reach the same conclusions as NSW and VIC.
Which leaves CWN battered and bruised, not only from the regulatory inquiries but also the severe loss of business during the lockdowns of the last two years. It will also now be without any international junket play which was the primary source of its misdemeanours.
In the meantime, Crown Melbourne has re-opened its gaming and non-gaming operations from 30 October as the Victorian lockdowns ended. This enabled thousands of employees to get back to work.
Investment view
It is well understood that Blackstone is primarily a property investor and would likely see CWN as a property company with a casino and hotel operator as its tenant. The obvious strategy for Blackstone would be to separate these two elements given the difference in valuation multiples applied to each.
A listed real estate investment trust structure with a separate management agreement with a casino and hotel operator would be an option under Blackstone’s stewardship. This concept is not new news in the market but there are other possibilities beyond just separating CWN’s assets in such a manner.
Indeed, CWN’s new CEO Steve McCann has already said that all options were on the table as far as CWN’s future was concerned, including the possibility of a separation into a property and casino/hotel business. What more invitation did Blackstone really need?
Star Entertainment has put its own merger proposal with CWN on ice while it lets the dust settle on CWN’s regulatory inquisitions. SGR has its own regulatory probe to navigate but it is relatively minor in comparison to what CWN has been through.
Interestingly, SGR’s merger proposal (May 21) included a cash alternative of $12.50 per share and the estimated synergies were worth $150-200 million pa.
But SGR is also a property company with a casino and hotel operator as its tenant, so it could be reasonably assumed Blackstone would look at SGR in the same way as CWN. Joining the dots, it would make sense for Blackstone, as the (assumed) new owner of CWN, to pursue the same merger strategy with SGR and to apply the same REIT structure. That would be even more attractive from Blackstone’s perspective as not only would it beef up the REIT substantially (and geographically given SGR’s heavy Queensland presence) but it would presumably also attract the same synergies that CWN and SGR had identified.
Arguably, SGR’s management team would be the ideal crew to dominate the merged gaming and hotel assets given its relatively unscathed reputation which might also be appealing from the various regulatory authorities’ perspectives.
Alternatively, Blackstone could simply retain the integrated resort and gaming structure at CWN and try to run the business better.
The fate of James Packer’s 37% stake is not known, but it would make sense for Mr. Packer to be talking with SGR before the CWN Board emerges with any definitive statement on
Blackstone’s proposal. Under the Victorian Royal Commission’s recommendations, Mr. Packer should sell down his stake to below 5% by September 2024. There is plenty of time for this to be completed, but if there is an attractive exit deal to be done, then it would remove a key distraction factor in CWN’s future.
Other outstanding issues for CWN include the AUSTRAC investigation and potentially more back tax to be paid in Victoria.
We still expect the main gaming floor in Sydney to be open by March 2022, just as the WA Royal Commission is due to report its findings.
We have retained our Buy recommendation on the basis of CWN’s attractive assets and the company being at an operationally low point but likely to recover. The corporate activity around the stock merely confirms this view.
