Echo Surges $700 Million With Casino Bid Seen: Real M&A
A potential bidding war between a Malaysian gaming magnate and an Australian billionaire is turning Echo Entertainment Group Ltd. (EGP) into the most expensive casino target since the financial crisis.
Companies linked to Kuala Lumpur-based gambling group Genting Bhd. (GENT) and its billionaire chairman Lim Kok Thay last week sought approval to boost their combined stake in Echo to more than 10 percent, mirroring a February request by James Packer’s Crown Ltd. (CWN) Their interest already increased Echo’s market value by almost A$700 million ($700 million) to A$3.3 billion, even as analysts cut 2012 earnings estimates for Sydney’s only casino operator by 40 percent, according to data compiled by Bloomberg.
Echo offers Packer, who wants a casino-hotel next to Sydney Harbor, and Genting, the only large Asian casino operator without a stake in Macau, the chance to profit from a surge in Chinese gamblers through Echo’s Sydney monopoly. Crown can bid as much as A$5 a share, 16 percent above yesterday’s close, CLSA Asia Pacific Markets said. An offer at that level would value Echo at 13 times estimated earnings before interest, taxes, depreciation and amortization, making it the priciest casino takeover since 2006, data compiled by Bloomberg showed yesterday.
“Genting rocking up on the register has turned the heat up,” Nick Berry, a Sydney-based analyst at Nomura Holdings Inc., said in a telephone interview. “Crown is more likely to bid than not. They have to, to get the control they want.”
Spokesmen for Echo and Genting in Australia declined to comment on any possible takeover. Ken Barton, Crown’s chief financial officer, didn’t respond to a message seeking comment.
Genting Singapore Plc (GENS) said on June 8 it had bought a stake in Echo, without disclosing its size. By June 20, the combined holding by Genting Singapore and Genting Hong Kong Ltd. (GENHK) had risen to 9.9 percent, according to Brisbane-based Echo. The two companies are backed by Malaysia’s Genting Bhd. and its founding family, a group that also owns casinos in New York and London.
Gaming regulators in the states of New South Wales and Queensland said last week that Genting had applied to increase its holding in Echo above 10 percent. The approval is required by Echo’s constitution. Genting executives may travel to Australia this week to meet regulators, according to a person with knowledge of the matter who declined to be identified because the information is private.
Echo rose 0.7 percent to A$4.33 a share in Sydney today, while Crown fell 0.1 percent to A$8.46. Genting dropped 0.7 percent to 9.42 ringgit in Kuala Lumpur.
Genting’s application was disclosed four months after Crown also said it was seeking permission to raise its holding in Echo above 10 percent. Perpetual Ltd. (PPT), the Sydney-based fund manager with a 3.7 percent stake in Echo, won regulatory approval yesterday to increase its stake to higher than 10 percent, at least seven months after it applied. Crown has offered to make an additional application to increase its stake beyond 25 percent if its first request is approved, it said today.
Echo, whose license guarantees The Star casino a monopoly in Sydney until 2019, offers Genting the chance to tap so-called VIP gamblers from Asia, in particular China, who are already traveling to Australia in growing numbers, according to Chong Lee Len, an analyst at Affin Securities Sdn. The company also owns three other casinos in Australia.
In Macau, the most popular destination for Chinese gamblers, high-stakes baccarat alone generated $25 billion of revenue, accounting for nearly three quarters of the former Portuguese colony’s total gambling revenue of $34 billion in 2011, data from the government shows. The number of short-term visitors to Australia from China last year rose 76 percent from 2006 to 542,000, according to the country’s statistics bureau.
While Genting doesn’t have a casino in Macau, Genting Singapore’s Resorts World Sentosa is one of only two casinos in Singapore. About 1.58 million Chinese visited the city in 2011, an increase of 35 percent from the year before, according to data compiled by Bloomberg.
“A lot of cross selling can be done,” Affin’s Chong said by phone from Kuala Lumpur. Genting “would like a meaningful footprint in the Australian gaming market. It does make sense because they know the workings of the Asian punters.”
Crown is also interested in VIPs, whose betting at its Australian casinos reached A$371 million in the six months through December, up 28 percent from a year before in part as a result of a “strategy to source new players from China,” according to a company presentation in February.
Although Crown doesn’t have a presence in Sydney, Packer, 44, has said he’s interested in building a new 350-room casino- hotel 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.
“Genting and Crown have as much to gain as each other from buying Echo,” said Michael Wu, a Sydney-based analyst at Morningstar Inc. “Both have a very strong VIP business.”
Genting and Crown may not be interested in acquiring all of Echo just to gain access to its VIP business, according to Ben Brownette, an analyst at Commonwealth Bank of Australia in Sydney. Echo’s VIP revenue of A$183 million in the six months through December accounted for 20 percent of the company’s A$908 million in total sales.
“You’re going to have to overpay for all of the assets to get some kind of synergy gain in a small part of the business,” Brownette said in a telephone interview. “It doesn’t make a whole lot of sense.”
Crown is instead more likely to build its Echo stake to almost 20 percent in order to influence strategy, according to Brownette. For Genting, it makes more sense to invest in other parts of Asia, he said.
Still, Echo has spent A$870 million on a multi-year renovation aimed at drawing more high stakes gamblers to The Star, and a minority stake may not grant Crown or Genting the degree of control over Echo that they seek, according to Sacha Krien, a Sydney-based analyst at CLSA.
“A full takeover bid is still the most likely outcome,” Krien wrote in a June 18 note to clients. Although the analyst expects initial bids of A$4.70 a share, or about 9 percent more than Echo’s closing price of A$4.30 yesterday, “this would likely be higher if a bidding war eventuates.”
A bid by Crown would be “value accretive” at as much as A$5 per share, Krien said. At that price, a takeover of Echo would be worth A$4.9 billion including net debt, or 13 times analysts’ estimates for Echo’s Ebitda of A$380 million in the year that ended last month, data compiled by Bloomberg show.
The 21 casinos in Asia with market capitalizations of more than $1 billion trade at a median of 9.9 times Ebitda, according to data compiled by Bloomberg.
Echo’s multiple would also be the highest in the industry since the $8.5 billion buyout of Station Casinos Inc. announced in December 2006, about two years before the collapse of Lehman Brothers Holdings Inc. spurred the worst financial crisis since the Great Depression. The offer for Las Vegas-based Station Casinos was valued at 19.3 times Ebitda.
Echo may lure a bid of A$4.85 a share, “in line with historic transaction multiples,” Nomura’s Berry wrote in a June 19 note.
“If you buy Echo, it’s not going to be cheap,” Affin’s Chong said. Still, Genting has “the financial muscle to outbid anyone. Now that they are applying to regulators for a more meaningful stake, it does appear they are more serious about business opportunities in Australia.”
Genting Singapore alone had S$4.8 billion ($3.8 billion) in cash at the end of March, data compiled by Bloomberg show.
Crown will need to raise about A$2.3 billion in new equity to fund a bid in order to avoid triggering its debt covenants, according to Berry. Packer said last month he will back the sale of Sydney-based Consolidated Media Holdings Ltd., of which he owns half, to Rupert Murdoch’s News Corp. for A$1.9 billion.
Many investors are still projecting a bidding competition even after Echo on June 15 forecast earnings for the year that ended last month that were as much as 29 percent below analysts’ estimates. Analysts’ projections for net income have fallen by 40 percent in the past 40 days, data compiled by Bloomberg show.
Echo is also seeking to raise A$454 million selling shares at a 27 percent discount, to repay debt and fund its high-roller program amid trading conditions it described as “difficult.”
The announcement followed a campaign by Packer, which featured full-page newspaper advertisements, to remove then-Echo Chairman John Story. The billionaire criticized Story for Echo’s “serious underperformance” and proposed a new director. Story quit on June 8 and Packer withdrew his proposal.
With many traders now awaiting a takeover attempt, Echo’s shareholders are unlikely to yield to any demands by Packer before he buys the company, according to Nomura’s Berry.
“If I was a shareholder, I’d say: bid for the company, then run it better,” he said. “But give me my takeover premium first.”
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