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Know when to hold ’em

Know when to hold ‘em and know when to fold ‘em poker players appreciate the frisson of an all-in $10 billion pot when it comes to the biggest game, Crown Casino, now in town. 

Minimum game buy in has to best the 50% stock $50% cash Wynn Resort $14.75 indicative pitch. With dubious honour of the shortest-lived takeover offer in Australian corporate history, Wynne pulled the bid after word of the buyout was leaked and Crown’s share price jumped 20% to $14.05.

But what of Wynne’s intentions? Obviously the Crown board was put on the spot when the preliminary bid details leaked and its hand was forced by ASX disclosure requirements. Takeover bids, in my experience, at some point, leak – culprits usually are non-attributable, self-aggrandizing, investment bankers and lawyers!  And Wynne’s discussions were far enough advanced on price and premium to market to suggest the offer may have passed under major shareholder, 46% owner James Packer’s nose, for his approval.  Packer could have become a 10% shareholder in Wynne, the single largest shareholder, if the bid proceeded worth $4.6 billion at the implied takeover proposal price. Although Crown did say neither it or Wynne had agreed on value or deal structure.

Apart from the necessary federal and state government regulatory approvals needed for a foreign change of control of a casino license, an interested bystander could surmise the Wynne bid was a little more advanced than “preliminary”. So has Wynne taken its bat and ball and gone home? Or is this part of a bigger picture strategy on its part to unsettle the Crown register. And to possibly put Wynne in the box seat position of exclusive bidder if it is coaxed back to the table?

The preliminary $14.75 bid is opportunistic. Crown’s December half year results showed normalized revenue was down slightly to $1.53 billion but that VIP revenue, the biggest profit swing factor, slumped by 12% for the period. This reflected a subdued main gaming floor performance at Melbourne and Perth, and also ahead of the completion of the Crown Sydney project.

Crown’s share price is off 20% from most recent highs and Wynne’s aborted bid implied a FY20e EBITDA multiple of 12.7x – less when you take into account the opening of Crown Sydney.

Australia is a strong market with gambling spends per head running at about $US1000 versus $US470 in the US. Australian casinos also attract significant Chinese customer trade which makes it attractive to Wynne which operates Casino’s in Macau and Las Vegas.  And gaming growth has shown modest growth in Australia for the past 20 years.

So in analyst speak a Wynne takeover of Crown gives it “incremental geographic diversity into monopolistic/duopolistic markets with considerable high end Asian play and meaningful stability from a government legislative perspective”.  Crown’s casino portfolio fits in with Wynne Resorts focus of owning a handful of luxury assets in the world’s best gaming markets. Crown becomes an attractive cross selling opportunity under one owner when around 75 per cent of Wynn’s revenue in 2018 was in Macau. Compared with 54 per cent of its 2017 Vegas table game revenue was from international players, with Chinese likely to be the largest proportion.

Wynne is innately aware of the regulatory hurdles it needed to jump through had its bid proceeded and a lengthy probity process was priced in to its bid.  So there is a purgatory space between deal announcement and close. But then that is a level playing field for all Crown bidders.

Crown’s post cancelled bid share price of just under $13, leaves plenty of manoeuvring room for other bidders.  Although casino rival Star Entertainment Group is unlikely to put forward a counter proposal to merge with Crown. Even though estimated cost saving synergies between the two could be worth between $1 to $1.50 per Crown share.

The most likely candidates to pony up for the Crown poker game is private equity. The stock is in play, and the only question now is the price.

International buyout firms like KKR, large into infrastructure investors like the US based CalPERS and Canadian Teachers Super, have the financial muscle to bid for Crown. Crown is a monopolistic business model with good historical margins. And the stock is cheap.

I think there is potentially money to be made out of a takeover arbitrage for Crown. Because I am betting Wynne will return to the table to try and stare out other competitors. And with close to $2 gap between the price and the lapsed indicative bid, there is plenty of room for bluffing.

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