Will Packer bow out of Crown?

Mar 25, 2021

The US private equity firm Blackstone has made a conditional non-binding offer for Crown Resorts Ltd, valuing the casino operator at over $8 billion.

The offer, of $11.85 a share, is down on the reported $14.75 per share offered by Wynn resorts, a US casino operator, in April 2019. But, of course, Crown has been through the wars repeatedly since then. An inquiry in NSW found that Crown was not a suitable entity to operate or be associated with the as yet unopened Barangaroo casino, and there are now Royal Commissions in both Victoria and Western Australia examining Crown’s suitability to continue to operate the casinos in those cities. On top of that, pandemic restrictions have hit the business, which was already losing high roller business after the well-publicised arrests of operatives in China in 2016.

Some analysts (but certainly not all) have suggested that the offer is at the low end of acceptable, although it factors in a premium of around 19% from the share price over the last few months. It is certainly a great deal higher than Crown’s five year low, at $6.12 in March 2020. Blackstone acquired a 9.9% stake in Crown in April 2020, snapping up a parcel acquired by Laurence Ho’s Melco for $8.15 a share. Melco had originally sought to expand its holding to nearly 20% by acquiring a chunk of Mr Packer’s holdings, but that, unsurprisingly, fell through.

Blackstone’s offer depends on the equity firm achieving regulatory approval in NSW, Victoria, and WA. Regulators in the latter two states are accused of having missed activities that the NSW inquiry uncovered, likely including money laundering, infiltration by criminal gangs and syndicates, and the ‘disgraceful’ behaviour of Mr Packer, who reportedly threatened an investment banker who failed to raise funds he sought for an attempt to privatise the business.

On top of this, the NSW inquiry was scathing in its critique of the governance and management arrangements for the company, along with the undue influence that appeared to accrue to Mr Packer, even after he stood down from the board for health reasons. So far, multiple directors and management have left the board, as the company attempts to meet the requirements of the NSW regulator (the Independent Liquor and Gambling Authority, or ILGA) to render itself suitable to operate Barangaroo. Similar requirements will undoubtedly be imposed by WA and Victorian regulators after the Royal Commissions in those states conclude and report, or perhaps during their course.

In any event, the Chair of ILGA made it clear that while the regulator welcomed the changes made by new board chair Helen Coonan, who is now also CEO of the company, they were but the start. Coonan has promised ‘root and branch’ renewal, although the extent of progress towards that goal is not entirely clear.

Blackstone operates or owns casinos in both the United States and Spain, and with assets valued at $800 billion, is a significant real estate investor with interests in infrastructure, hospitality and entertainment. If successful, it would likely send in its own management team, and may also privatise the company, taking it off the ASX.

Regulatory approval already achieved by Blackstone in other jurisdictions would be taken into account by Australian regulators, although they are required to undertake their own scrutiny of the company’s suitability, and that of management and governance arrangements. More importantly, Blackstone is in a position to put significant resources into ensuring that it achieves regulatory compliance. Key recommendations from the NSW inquiry included changes in culture, compliance with anti-money laundering laws, and avoidance of criminal infiltration. The inquiry’s recommendation for significant change at management and board levels would also be achieved by a Blackstone takeover.

Blackstone may buy the property and rent it to another operator, as it does with the MGM Bellagio casino in Las Vegas. Star Entertainment would be a contender for that, although it too may consider making an offer.

The real question is whether Mr Packer is prepared to take a bath on the share price and walk away with $3 billion. The alternative is a watering down of his influence, whether by selling down his shareholding or entering into an arrangement not to exercise more than 10% of his holdings. For the company, the road ahead remains difficult, with a comprehensive overhaul required and regulatory uncertainty in multiple jurisdictions. Selling out might be a straightforward way to solve those problems.

Some analysts have suggested that Blackstone’s approval may take up to a year. However, the political pressure always at the heart of Crown’s influence in Australia may also be significant. Crown is a big employer in WA and Victoria (as Premiers of both states regularly remind us) and contributes about $60 million a year to WA revenue, and $230 million to Victoria state coffers (in a normal year). These, along with Crown’s connections and political influence, are almost certainly key reasons why its many failings escaped the attention of regulators, for whom it was made clear by governments of all persuasions that regulation needed to be undertaken with a light hand.

Thus, such pressure might be converted into a fast-track approval process to ensure that Crown stays open in Melbourne and Perth and that Barangaroo opens later in the year. There is also little to stop Crown from continuing to operate existing casinos until both Royal Commissions are concluded, with reports and findings some months away.

However, it may be that shareholders, including the now reclusive Mr Packer, resist the offer, preferring to fight it out to achieve regulatory redemption and continued ownership.

Crown’s many travails have reinforced the need for significant reform of gambling regulators and regulation in Australia. Commissioner Bergin, in her report, argued for much stronger and more curious regulators, withstanding powers of a Royal Commission, and the ability to inquire into reported issues with compliance. The Victorian Royal Commission is not inquiring into such matters, although a separate internal inquiry is underway. Conversely, the WA Royal Commission is. In any event, the ‘do it yourself’ casino regulation seems likely to be out of fashion, at least for some obligatory period of revivified enforcement.

Adherence to regulatory requirements has not been a strong point for Australia’s gambling industry, particularly where it involves effectively addressing the harms that gambling generates. Doing so would have significant impacts on the bottom line. Indeed, Crown is indemnified for a CPI-adjusted $200 million if new harm prevention measures actually work.

The entire Crown imbroglio demonstrates how poorly we regulate gambling in Australia. It would be great if regulation was taken seriously, and regulators were well resourced and supported by governments to ensure the integrity and the safety of those who gamble. There is a possibility for this to be a longer-term consequence of this mess. We shall see.

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