James Packer has stepped down as a director of Crown Resorts. However, he is still Crown’s controlling shareholder and the architect of the group’s ambitious expansion strategy. Crown’s shares have climbed 14 per cent in a week on the back of the privatisation speculation.
It’s not clear whether James Packer will pull together a privatisation offer for his 53 per cent-owned Casino group, Crown Resorts, but it is easy to work out why he would be considering it. Crown is at a stage where the risks it is taking may well be best handled behind closed doors.
Packer vacated the chairmanship of Crown in August in favour of Rob Rankin, a former Deutsche Bank executive who a few months earlier had taken over as chief executive of Packer’s main private company, Consolidated Press Holdings.
Packer sold his Sydney mansion and based himself in Israel and Los Angeles, the home of his two children, and the home of the Hollywood movie industry that he is increasingly involved in.
Then on Monday this week, Crown announced that he had stepped down from Crown’s board.
CPH was studiously vague last week after Crown was queried about media reports of a possible privatisation offer.
CPH held confidential discussions about investments including Crown “from time to time”, would put a privatisation proposal to the Crown board if one existed, and had not done so, it said, adding that nobody should take any of that to mean anything in particular.
As Deutsche Bank says in a note to its clients, Packer’s exit from Crown’s board reduces potential conflicts of interest should CPH launch a privatisation offer.
Crown’s shares have climbed 14 per cent in a week on the back of the privatisation speculation, they are still are still down 4 per cent over a year and down 27 per cent over two years, creating a potential opening.
Packer is still Crown’s controlling shareholder and the architect of the group’s ambitious expansion strategy, though. He said on Monday that resigning from the board would allow him to focus more squarely on the expansion projects.
Crown shareholders are therefore backing his ability to deliver them, in part by maintaining a marathon networking circuit that takes in Hollywood, Macau and elsewhere, and last financial year saw him spend the equivalent of seven weeks in the air.
Any private investment combines that join him in a privatisation attempt will be backing his vision, stamina and ability, too, because Crown is delicately poised.
Its 34 per cent-owned Macau affiliate, Melco Crown Entertainment, has just opened its second big casino in Macau, the $4 billion Hollywood-themed Studio City complex.
Studio City is a high-end casino, but it has been launched at a tough time. Gaming revenue in Macau fell for the 18th straight month in November and was 32 per cent lower than a year earlier. Melco Crown’s US-listed shares are down 30 per cent in a year, and 55 per cent in the past two years. The weakness in Crown’s share price is to an extent imported from its Macau exposure.
In Sydney meanwhile, Crown is developing another $2 billion high end casino complex, on the harbour at Barangaroo.
It also has plans to develop a $1.6 billion-plus casino in the best part of the Las Vegas Strip, a market it has unsuccessfully attacked before.
If they are successfully developed, casinos become profit machines that are governed to a significant extent by an algorithm called the “theoretical win rate” – the casino’s long-run cut on high roller activity. High rollers beat the theoretical win rate in some weeks, and lose against it in others. In the long run, the house’s win rate reverts to the mean.
Crown is in an ambitious expansion phase at at a time when it is already carrying a solid debt load, however (debt to debt plus equity is about 38 per cent), and objective risk rises when aggressive expansion is occurring.
Through Melco, the group has doubled down in Macau, in effect making judgement calls that China’s corruption crackdown will not permanently undermine revenue, and that China’s economic growth will recover.
With that and its other big casino developments it is also seeking to establish itself as the global destination of choice for super-rich, high roller gamblers.
High roller revenue delivers lower profit margins than revenue taken from the main casino floor. It is the largest slice of of the global casino gambling pie, however – and Crown will be setting new standards of luxury in its new casinos as it seeks to attract enough wealthy gamblers to drive earnings higher despite the margin compression that high roller revenue creates. Barangaroo’s “key cost” or development cost per room for example will be about $4.5 million, twice as much as United States casino mogul Steve Wynn spent on the Bellagio casino in Las Vegas.
It could work. Crown itself is a bit of strategic gamble right now, however, and that creates the circumstances for a well-pitched privatisation offer. James Packer’s gamble would be that Crown’s expansion will elevate the group to a new earnings tier. The judgement of those accepting a privatisation offer would not be that the plan was sure to fail, but that the risks involved were big enough to make cash in the hand a better option for them.
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