Echo Entertainment Group Ltd. is poised to become the target of the largest casino takeover in more than five years, thanks to its monopoly in Sydney and 16 million potential Chinese gamblers.
As allegations of sexual harassment at Echo’s showpiece Sydney casino The Star pushed its shares to an all-time low this year, Melbourne-based rival Crown Ltd. doubled its stake in Echo to 10 percent and asked for regulatory approval to buy more. Even after the move sparked a record rebound in Echo’s shares, the Brisbane-based company is still trading at 1.9 times sales, less than one-third the average for Asian gaming companies, according to data compiled by Bloomberg.
With the only casino in Sydney, Echo offers suitors a chance to tap so-called VIP gamblers from China. As they venture beyond Macau, VIP wagers at Echo’s and Crown’s tables may rise to $100 billion by 2014, UBS AG estimates. Crown, backed by billionaire James Packer, may be joined by Genting Singapore Plc and Wynn Resorts Ltd. in seeking to acquire Echo, UBS said. Genting could pay A$4.5 billion ($4.6 billion) in a takeover, according to Macquarie Group Ltd., which would be 44 percent above Echo’s current market value and the largest offer for a gaming company since 2006, data compiled by Bloomberg show.
“These kinds of licenses don’t come up every day,” said Sacha Krien, an analyst at CLSA Asia-Pacific Markets in Sydney. “They provide exposure to Chinese casino tourism. We believe a bid from Crown is imminent.”
The board of Echo “would be supportive of any transactional initiative” that boosts shareholder value, spokesman Brad Schmitt said by e-mail.
Echo, spun out of Australia’s largest sports betting group Tabcorp Holdings Ltd. last June, has spent A$870 million since 2008 renovating The Star on the shores of Sydney Harbour. The complex now features a new five-star hotel, invitation-only gaming rooms, the first branch of David Chang’s Momofuku restaurant chain outside of New York, and two leased private jets to fly in high-rolling gamblers.
While that has improved the ambiance of the property, the spending is not yet factoring into Echo’s valuation, according to Sam Theodore, an analyst at UBS.
At last week’s closing price of A$4.55 a share, Echo traded at 1.9 times its sales of A$1.65 billion for the fiscal year ended in June 2011, according to data compiled by Bloomberg. Echo was still part of Tabcorp for most of that period. That compared with an average ratio of 6.4 for casino and gaming companies in Asia with a market value of more than $1 billion.
Echo fell 0.9 percent to A$4.51 a share in Sydney today. The S&P/ASX 200 Index closed down 2.2 percent, its biggest loss since December. Crown dropped 2.6 percent to A$8.95 per share.
Echo is valued at 13.9 times its A$226 million in profit for the last fiscal year, while its Asian rivals current trade at an average of 20.8 times earnings, the data show.
“Echo’s undervalued,” Theodore said in an interview in Sydney. “It’s opportunistic to buy it now because someone’s spent the money without the market giving them credit.”
Echo’s shares plunged to a closing low of A$3.48 on Feb. 16 after the New South Wales state Independent Liquor and Gaming Authority said it appointed an investigator to look into allegations that Sid Vaikunta, former managing director of The Star, made “unwelcome sexual advances” to a staff member. Vaikunta left Echo “after his behavior in a social work setting,” Echo said Feb. 2.
The company “welcomes the opportunity for an independent investigation,” Echo said Feb. 16. Vaikunta couldn’t be located to comment on the allegations and Echo and the casino’s regulator said they had no contact details for him.
The share-price drop may have created an opportunity for Crown, which on Feb. 24 said it became Echo’s largest shareholder with a 10 percent stake, triggering a one-day, 13 percent gain in the stock. Crown said it was seeking a seat on Echo’s board and government permission -- a requirement of Echo’s constitution -- to raise its holding beyond 10 percent.
“Any negative allegations and claims made against Echo management could be used to highlight Crown’s own management credentials in a bid to win investor support for a takeover bid,” CLSA’s Krien wrote in an April 12 note to clients.
Ken Barton, Crown’s chief financial officer, didn’t return calls seeking comment on the company’s intentions regarding Echo. Genting Singapore, in an e-mailed response to questions, declined to comment on a potential acquisition.
For potential buyers, Echo’s refurbished Sydney casino may offer a way to profit as gamblers from mainland China venture beyond Macau, the world’s biggest gambling market and the only place in China where casinos are legal.
The former Portuguese colony last year attracted 16.2 million mainland Chinese tourists. The 11-square mile territory’s total gambling revenue of $34 billion in 2011 was nearly six times the $6.1 billion of the Las Vegas Strip.
With Macau’s hotels running out of rooms, companies in Singapore and Australia are looking for ways to capture some of the gambling money from mainland China, said UBS’s Theodore.
“Macau just doesn’t have the capacity for all the money that Asia’s gamblers are prepared to spend, and Singapore and Australia are ways of tapping that overflow,” he said.
The most prized customers are VIPs, who are treated to all-expense paid holidays to casinos because of the large sums they wager at the gaming tables, said Gary Pinge, an analyst at Macquarie in Hong Kong. Macau’s high rollers generated $25 billion of revenue in 2011 from the baccarat tables alone.
As these gamblers are lured to Australia, bets by the VIPs at Echo and Crown’s casinos could rise to $100 billion by 2014, from $60 billion last year, UBS estimates. Gambling revenue for casino operators -- the house’s net winnings on all bets -- is typically only a small proportion of the amount wagered.
“The main asset in a casino VIP business is its database of customers,” Pinge said in a telephone interview. “The more properties you have the more synergies you can get.”
Genting Singapore, the only large Asian casino operator without a stake in Macau, needs to add to its Resorts World complex in Singapore, according to Pinge. Australia’s mature casino industry is well-placed to fulfill that role, he said. Crown has a 33 percent share in Melco Crown Entertainment Ltd., which holds one of Macau’s six casino resort licenses.
About 542,000 short-term visitors came to Australia from China last year, a 76 percent increase from 2006, according to the country’s statistics bureau.
“Eighty percent of travelers out of China end up going to a gaming venue on their first trip,” said David Wiadrowski, an entertainment and media partner at PwC in Sydney. “With the renovations at The Star, they’re trying to do as much as they can to attract as many as they can.”
Sydney’s Opera House
Echo would have its own attraction to Crown’s chairman and largest shareholder Packer, giving him control of Echo’s casino license in Sydney, which grants it a monopoly there until 2019, as well as licenses for three other casinos in Australia.
Packer, 44, wants to build a 350-room casino-hotel with views of Sydney’s Harbour Bridge and Opera House at the Barangaroo development site near the city’s central business district. To do that, he would need to convince Echo and the New South Wales’s state government to grant a separate permit, or take over Echo altogether.
Steve Wynn’s Las Vegas-based Wynn Resorts or its majority owned Wynn Macau Ltd. are also potential suitors for Echo, according to UBS’s Theodore. Wynn would like a toehold in Australia for the same reason as Genting Singapore -- to find a new destination for its high-rolling clients, he said.
“Genting’s in Singapore but it’s not in Macau. Wynn’s in Macau but it’s not in Singapore. It’s about adding another geographic option for their VIP customers,” Theodore said.
In an e-mail, a spokesman for Wynn said he was unaware of any discussions between Echo and Wynn Resorts.
If Packer wins permission to raise his holding, Crown’s stake could make it difficult for a rival to complete an acquisition, according to Adam Alexander, an analyst with Goldman Sachs Group Inc.
“If Crown moves to 20 percent it makes it virtually impossible for those guys to come in and take it over,” he said by phone from Melbourne. “Trying to go head to head with Packer in his own market would not make sense.”
Crown may have less capacity to finance a deal than Genting Singapore or Wynn. With only $194 million in cash, Crown’s $577 million of operating cash flow in the 12 months through December compared with Wynn’s $1.5 billion and Genting Singapore’s $1.1 billion, according to data compiled by Bloomberg.
If Crown funded 60 percent of a A$3.5 billion offer with its own shares, the remaining A$1.4 billion of debt would put Crown’s credit ratings under pressure, Deutsche Bank AG’s credit strategists said in a March 12 note to clients. The company is the only gaming stock to be judged investment grade by all three major credit rating companies.
‘Change of Control’
Genting Singapore, with $2.5 billion in cash at the end of December, raised another S$1.8 billion ($1.5 billion) by selling bonds in March, to finance “capital expenditure and the expansion of its business.”
Packer may be able to help fund a bid by selling other stakes. Consolidated Media Holdings Ltd., 50 percent owned by the billionaire, said last week it held talks for a “change of control.” Officials at Consolidated Media, which has a market value of A$1.8 billion, didn’t respond to requests for comment.
Genting Singapore, controlled by Malaysia’s Genting Bhd., which opened a casino at the Aqueduct racetrack in Queens, New York, last year, could “comfortably” afford to pay A$6.50 per Echo share and still boost its earnings, Macquarie’s Pinge said.
“If there was a bidding war, Genting would be hard to beat,” said CLSA’s Krien. “They are cashed up.”
A bid at that level would value Echo at a multiple of 20 times its fiscal 2011 earnings. That compares with a median of 26 times profit paid in 41 acquisitions of gambling companies in the past decade, data compiled by Bloomberg show.
An offer of as much as A$5.30 a share, or 16 percent above Echo’s current price, would still be “value accretive,” to Crown, said CLSA’s Krien. A takeover at either price would be the largest of a gaming company since the buyout of Las Vegas-based Station Casinos Inc. announced in December 2006 for $8.5 billion, including net debt, data compiled by Bloomberg show.
“To get into this market you have to have a license,” said UBS’s Theodore. “And it’s unlikely that governments in Australia will issue any more.”