You're playing blackjack and have been dealt two nines. What do you do? Stand pat and hope you're close enough to 21 to win? Or split your hand and turn it into two games?
That's essentially the wager that Crown Resorts, the casino company controlled by Australian billionaire James Packer, is offering investors.
Hitherto, it's offered investors a decent combination of risk and reward: Two boring Australian casinos whose earnings growth is steady but unspectacular, plus a stake in Macau's Melco Crown Entertainment and development projects in Las Vegas and Sydney, which could be either money pits or gold mines.
The combination has been attractive to investors. Crown is the only casino group globally judged investment grade by all three major ratings firms . Only Wynn Macau, Wynn Resorts and Sands China have a higher enterprise value relative to forecast Ebitda.
A split Crown would be quite a different beast. The domestic business would almost turn into a regulated utility, fueled by the renewable resource of Australians' undying willingness to feed their savings into slot machines, and paying out 100 percent of its net income as dividends. Only the prospect of a new Sydney casino set to open in 2019 or 2020 gives potential for transformative growth.
What of the international unit? There are lots of glitzy-sounding assets: That stake in Melco Crown; a building site for a potential casino, Alon, close to Wynn and Trump properties at the north end of the Las Vegas Strip; the chance to join Robert de Niro as a shareholder in fancy restaurant chain Nobu; a bunch of cast-offs from the disastrous private-equity buyout of Caesars Entertainment; and half of Aspers, a British casino company with a suite of properties in slightly uninspiring locations such as Milton Keynes and Northampton.
There's not a huge amount of cash coming out of that group. Crown's share of Aspers lost A$20 million ($14.8 million) in the year through June 2015, although the Australian company did get A$16.4 million in interest payments through a related-party loan.
Nobu was similarly unimpressive -- combined with a 50 percent share in Packer's family horse stud, it provided just A$400,000 of net income in the six months through December. And you can get a good sense of how much money is likely to come out of the Caesars business from the fact that Crown picked up the assets in 2013 for $22.6 million.
That leaves Alon and Melco Crown. The former is going to suck in a lot of money before it starts pumping anything out: It will require an equity investment of $400 million to $500 million and total capital spending of $1.6 billion to $1.9 billion, according to the prospectus for Crown's subordinated notes issued March 2015. At this stage, there's no set opening date.
Which leaves Melco Crown. On the plus side, it's the most highly rated of Macau's casinos based on forward price-earnings multiples, thanks to the fact that major building works are finished and it's the sort of mass-market destination the territory wants to encourage. Margins, however, are wafer thin and Crown shareholders are only entitled to them in accordance with their 27.4 percent shareholding.
Even if Melco's ongoing revision of its dividend policy results in it paying out 100 percent of profits as opposed to the current 30 percent, that would suggest income flowing on to Crown of A$63 million this calendar year, A$90 million during 2017 and A$125 million in 2018, based on analysts' forecasts for Melco's results. That compares with A$388 million for Crown's existing business in the 12 months through December.
Shareholders who think the Vegas casino will make the international unit comparably attractive versus the staid Australian business should take care: It's only going to get built with either a dramatic turnaround in Macau, a mountain of new debt or a dilution in Crown's equity stake.
A wager on that is like hoping for an ace to turn up. If you get lucky, it might result in a huge payout. But if you want to stay in the game, boring bets are best.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Las Vegas Sands has an investment-grade rating from S&P and Fitch but is junk at Moody's. Genting Bhd. has the highest ratings globally from S&P and Moody's, but isn't rated by Fitch.
Aspers' losses don't count against Crown's income because the investment is valued at zero on Crown's balance sheet.
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