Odinian Beta

Despite all the media hoopla over regulatory concerns, Crown Resorts (ASX: CWN) remains an attractive target for would-be acquirers. It owns probably one of the best casinos or “integrated resorts” in the world, namely Crown Melbourne, with Crown Perth also being a monopoly. The company’s Crown Sydney development is also likely to earn decent returns once the New South Wales regulators allow it to open in due course.

Earlier this year, Blackstone, which already owns just under 10% of Crown, lobbed a bid at $11.85 per share before raising it to $12.35 per share. Crown also received a cash and shares bid from competitor Star Entertainment at $12.50 per share, as well as a structured finance transaction from Oaktree which involved lending the company money to buy back James Packer’s 38% stake.

However, with the Victorian Royal Commission uncovering additional transgressions by Crown, the bids were subsequently withdrawn.

Keeps Melbourne licence

With the Victorian Royal Commission finding Crown “unsuitable” but allowing it to keep its Melbourne licence, it is no surprise that bidders have returned, with Blackstone lobbing an increased bid of $12.50 per share today.

Will it be enough to persuade Crown and Packer to accept?

With Star Entertainment now mired in similar regulatory investigations to Crown after media allegations of allowing money laundering, dealing with certain undesirable persons and other matters, it is unlikely to be able to respond to Blackstone’s increased offer.

As for Oaktree, James Packer is a willing seller at the right price and so there is the potential for Oaktree to return to the negotiating table, along with additional potential offers from other strategic or financial players.

I note that US and Macau casino giant Wynn offered $14.75 per share for Crown in April 2019, although the offer was subsequently withdrawn when details leaked to the press. Of course, this was before the coronavirus temporarily shut down Crown’s international VIP business and also before the recent regulatory enquiries and Royal Commissions that have more permanently reduced the international VIP business including banning Crown from dealing with junkets.

Even so, in my view this is an opportunistic bid by Blackstone, who most certainly aren’t fools.

Now that the question as to whether Crown could keep its best asset in Crown Melbourne has been resolved in the affirmative – the requirement for Crown to demonstrate suitability in two years’ time should be a foregone conclusion – Crown’s properties are set to benefit from reopening as restrictions are eased and borders reopened.

Domestic punters should rapidly return to Crown Melbourne just like they did with Crown Perth after the initial lockdowns last year, and I would expect both domestic and foreign tourism to rebound fairly quickly as borders are reopened.

Like other casinos, Crown’s highest margin business is ordinary punters or the “grunt” business. This is unlikely to be affected much, if at all, by the imposition of additional anti-money laundering controls and cashless gaming.

Crown has also just finished a significant capital expenditure programme including the $2.2bn (net $1.1bn after apartment sales proceeds) spent on Sydney and so free cash flow should rise quickly as its properties reopen and gamblers return. This will allow the company to rapidly repay its remaining debt and start returning cash to shareholders either via the resumption of dividends and/or share buybacks.

As such, selling now is foolish in my view.

As I said, Blackstone aren’t fools – but neither is Packer. I suspect he will require a materially higher bid to part with his stake, and as he still owns 38% of the company, as goes Packer so goes Crown.

It will be interesting to see what transpires.