Why one of Australia’s biggest casino operators doesn’t deserve to be saved

The buzzards are circling, and the coyotes are licking their chops because the pulse is getting weaker by the minute at Star Entertainment.

Where six months ago, the casino operator looked like a company struggling with regulatory issues and profit problems; today, it’s running out of cash to keep the lights on and is buried under debt. This is generally the final stage of the corporate palliative process, and in Star’s case, the end may be just around the corner.

So, while we play the waiting game, maybe it’s time to consider putting Star out of its misery. Because it just doesn’t have many options on the table.

Once the company’s flagship asset, Star’s Sydney casino is now worth little more than its hotel rooms as the Minns government refuses to come to table on tax deferrals.Credit: Bloomberg

US corporate vulture Oaktree’s latest attempt at picking up Star’s debt, offering its secured lenders – Macquarie, Westpac, Deutsche Bank, Washington H Soul Pattinson and Barclays – an opportunity to sell their debts at a discount isn’t likely to pass muster.

Theoretically, under Oaktree’s offer, if the struggling Star owed a bank $50 million, Oaktree would buy that loan for $40 million. The upside for the bank is that it’s guaranteed to get $40 million, and Star can keep plodding along. However, Star’s lenders – who are collectively owed $430 million, and in whose hands Star’s fate sits – are well covered in case the casino giant goes into voluntary administration.

The company is churning through cash at rate of $35 million a month, so a rough back of the envelope calculation says it can keep the lights on for another ten days.

They are confident they will get all their money back if Star’s various assets, valued at around $800 million, are sold off. It’s a gamble because those assets may not fetch the expected price at a firesale, but it’s one the lenders are willing to take.

Meanwhile, other opportunists have also been busy attempting to buy various Star fixtures on the cheap. Star’s Asian joint venture partners had a tilt at buying the Brisbane casino complex, and seasoned hotelier (and Star’s largest shareholder) Bruce Mathieson pitched a bid for the Gold Coast property a few months ago.

To date, none of these offers have been sufficiently generous to entice Star’s board or the company’s lenders.

Just how long they can hold out is now the big question. Star is churning through cash at a rate of $35 million a month, so a rough back-of-the-envelope calculation says it can keep the lights on for another ten days.

As if the day-to-day costs weren’t enough, Star’s coffers are being further depleted by the expensive ongoing legal costs associated with the case mounted by the Australian Securities and Investments Commission against its former executives and directors.

It’s an expensive affair, especially at a time when Star’s management is desperately trying to cut costs.

As for Star’s current chief executive, Steve McCann, he is hanging on by his fingernails as he pitches to the Queensland and NSW governments to enter into earn-revenue-now-pay-tax-later arrangements. It’s very much “last chance saloon” territory, and even if McCann is successful, it won’t solve Star’s ongoing problems.

Star, led by chief executive Steve McCann, is in a desperate struggle to meet the conditions of a loan agreement which will give it access to $100 million.Credit: Dominic Lorrimer

Both Star and its competitor Crown, which is underperforming for its US owner Blackstone, are in the grips of a spiral of sorts.

Australian casinos are structurally challenged. On the one hand, they have been disrupted by online gaming operators and the clubs and pubs, which are armed to the teeth with pokies and dotted across the suburb. On the other hand, there is the regulatory pressure that has made casinos a dirty word.

Running a good, clean casino is proving to be expensive.

It has forced everything from the introduction of carded play to the breaking of ties with the offshore junket operators that shipped in the high-roller players from China.

As revenues shrink and costs rise for Star and Crown, let’s not forget that a regulatory backlash was always coming, given the poor governance and behaviours of the casinos for more than a decade.

So, with the reckoning at hand, it may be more worthwhile to forget about lifelines and instead put the company in the hands of administrators and tear the old Star down. What emerges from those ashes would need to be a casino operator with little debt and a new cost base.

A new Star could be reborn, maybe as the owner of huge football field-sized pokie stadiums, full of players packed in like sardines nursing repetitive strain injuries from excessive button pressing.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.