Star casino attempts a grand deal with no leverage left
The golden rule is, don’t make deals without leverage. Star has none, leaving its board in the worst possible position to fight for survival.
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It’s the very last chance for the near terminal Star Entertainment as the casino’s directors weigh up whether to reach for a financial bailout that’s come at the equivalent of 10 seconds to midnight or pull the plug once and for all.
To highlight how perilous the situation is, outside the Star boardroom at its Union Street offices in Sydney on Friday administrators were on standby. In the next room were its bankers, and both rooms were running short on patience.
If Star’s directors, led by former National Australia Bank chief legal executive Anne Ward, can’t get financing – mostly through rushed asset sales – then they can’t sign off on the half-year accounts. It’s that simple.
This would trigger a “material uncertainty” around Star’s ability to continue as a going concern and safe harbour protections that it’s been operating under since last year may not apply.
It’s been a slow-moving train wreck for Star for most of last year.
The casino is fast running out of cash as it drowns in regulatory demands. It hasn’t had time to adjust to a major crackdown in NSW on casino gaming, with new rules requiring punters to go cashless as well hard daily betting limits.
Added to this is Star’s share of the heavy cash calls needed to finish the $3.6bn Queen’s Wharf development in Brisbane. It also needs to refinance the debt sitting in the venture.
Looking further ahead it has more fines coming down the line from Austrac, the state regulator, a shareholder class action, and higher NSW gaming taxes. The casino has made multiple warning to investors that it is running out of cash, including last month when it said it was down to its last $78m.
On Friday as it delayed the release of its accounts yet again, Star warned it all could all come down to a last-minute sale.
One emergency option being considered by directors is to sell all the hotels. This will leave Star essentially as a tenant in its own buildings as a casino operator.
As US president and chief deal-maker Donald Trump regularly declares: don’t make deals without leverage. Star has none, leaving directors in the worst possible position as they horse trade the $1.1bn in property assets it has left sitting on the balance sheet.
A collapse of Star would be devastating for more than 8000 employees and hundreds of suppliers to the casino. And unlike airline Rex or a steel mill in Whyalla, governments won’t be rushing to bail out this corporate collapse.
The reality for Star’s directors, is while they have the final sign-off on the fate of the business, it’s really the lending consortium including Deutsche Bank, Macquarie and Soul Patts, calling the shots given they are the ones that have security over the assets.
That’s why they firmly rejected a lowball $650m financing offer from hedge fund Oaktree, which would have required a hefty haircut to the debt that’s owing to them. There’s the live option of a split, with billionaire and large shareholder Bruce Mathieson still hoping to buy out the well-regarded Gold Coast casino, although he hasn’t made any fresh approaches in recent weeks.
It all comes down to this. Star could limp through the weekend, or the casino may just yet find another stay of execution. Whichever way it goes, Star may never fully recover.
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Qantas surge
The profit surge that powered Qantas shares to a record high has now seen the Australian airline jump several spots to hit number 16 among the world’s most valuable listed airlines.
At $14.4bn, Qantas has now overtaken US Lufthansa ($13.8bn), regional major Alaska Airlines ($14.1bn) and is just short of Japanese major ANA Holdings ($14.45bn), American ($15.4bn) and new Australian entrant Turkish Airlines ($19.1bn).
Even with shares closing at an all-time high of $9.52 on Friday, Qantas is by no means overpriced compared to rivals, trading on a price-to-earnings ratio of 11-times. Compare this to around 19-times for the benchmark S&P/ASX 200 index, Qantas still represents a value play (if you think there’s growth ahead).
This value puts Qantas a nose ahead of the world’s biggest, Delta, which trades in a more competitive market on a multiple of 10-times, in line with Asian players like Singapore and Japan Air, and well behind several European carriers and Alaska at 14.6 times.
All this is important for smaller rival Virgin. The Qantas share surge and its outlook of strong demand for travel, represents a flashing green signal for Virgin owner Bain Capital. Bain has been looking for an off-ramp for its holdings in Virgin through an on-again, off-again stockmarket listing. Now Virgin’s Qatar alliance has been approved, Bain is expected to move sooner than later on a float. And why not?
Qantas chief executive Vanessa Hudson tells The Australian she still sees plenty of growth ahead for her airline, with demand holding up and loyalty expected to be the big driver in coming six months. The progressive arrival of new aircraft will provide an additional earnings boost, given lower costs and improved capacity. Qantas’ low-cost carrier Jetstar was the standout in the December-half numbers returning it’s highest ever earnings of $439m, up 35 per cent on the half. Jetstar had the arrival of new Airbus planes, but was able to capitalise on Australians still having a hunger to travel even when navigating the cost of living pressures. For investors $400m of dividends were reinstated in the December half, with more coming. Some $250m is planned as a starting point for the second half.
“We have a got a good growth story,” Husdon says. Still, the looming arrival of Qatar through Virgin will put Qantas’ international business under pressure. International staged the slowest growth of all of Qantas’ business up 2 per cent. Elsewhere,
Qantas is expected to face a cost of around $65m this year for the Albanese government’s Same Job Same Pay rules. At the same time it has more than $8bn in capex spending over the next two years.
Hudson says Qantas is building an “agile mindset” in its business and the way it operates and invests. This is so the airline can better respond to all sorts of different forces, whether they be competitive or geopolitical.
Aviation is a notoriously fickle business, but for the moment, Qantas and its newish CEO are flying high.
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Originally published as Star casino attempts a grand deal with no leverage left
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