Crown Resorts directors bet the house on Star Entertainment

The Crown Resorts board has effectively embraced ‘The Big Merger’ with rival casino group Star Entertainment - but they want a higher price.

Crown Resorts chair Helen Coonan. Photographer: Adam Yip

Helen Coonan and her board of directors at Crown have made a series of calculated and arguably risky gambles in so quickly and so comprehensively and unequivocally rejecting the offer from Blackstone.

Yes, the offer had ‘Opportunism’ written all over it with a capital-O – by definition, it undervalued Crown shares - but it’s always better to have two bidders at least nominally in the room.

Yes, Blackstone – and indeed anyone else, including fellow main-chancer Oaktree - can always re-enter the room.

Nevertheless, for now, Crown is effectively embracing ‘The Big Merger’ with Star. It was also laying out, in the detail of its Blackstone rejection, the basis for it to argue for a higher price from Star – and how it could initiate its own proposals to upvalue Crown shares or release value for shareholders.

This would be done most directly by placing all the Crown real estate assets in a property trust for sale or de-merging to holders, with Crown leasing back the operating assets.

The timing of the announcements was telling – the day the Victorian inquiry kicked off.

Even more telling was what happened last week – Crown’s deal with the NSW Gaming Authority that will clear Barangaroo to get underway. Just as the NSW Bergin Enquiry essentially set in train the other inquiries Crown is now wending its way through – in Melbourne and in Perth – so this NSW deal will essentially deliver positive outcomes for Crown with both. Sure, the Crown directors are going to face further legal tongue-lashings and, like the NSW deal imposed both immediate and on-going costs, the other two will as well.

Crown Resorts chair Helen Coonan. Photographer: Adam Yip

But in essence, the rules and operating procedures that will get Barangaroo operating will be applied to Crown in Melbourne and Perth. That, and of course, the distancing of James Packer – which would then also apply to any merged Crown-Star.

Further, if Star follows the ‘new rules’, it would not only comfortably secure its own licences, but effectively gain pre-approval for merging with Crown.

That’s so far as the probity issues are concerned. That would still leave the competition issue. But although it would create an all-but total national casino monopoly, I do not see that as a major problem.

Apart from the high-rollers – and they are almost entirely non-residents – the casinos don’t really compete. Their competition future is with online.

Is it really the job of the ACCC to ensure that foreign multi-millionaires and billionaires still get seduced by two competing casino groups offering them better private jets, suites, and other goodies?

Something, that was a major factor in the bad behaviour that Crown persuaded itself to allow if not indeed actually promote?

The problem with the Star proposal is that it is mainly-to-entirely paper.

Crown holders are being offered 2.68 Star shares for every Crown share.

At the moment that is worth only $10.99 per Crown share – well under the $12.35 Crown has just rejected from Blackstone, to say nothing of Crown’s $13.15 share price.

Yes Star has a $12.50 ‘cash alternative’ – still way too low on the Crown assessment. But it’s also only available up to 25 per cent of the Crown stock. Some might get it for all their shares, but only if other holders went entirely for the Star paper. The blended offer is worth just $11.37.

The problem with the Star proposal is that if it tries to offer more – either in cash or shares – it will start to undermine the value of its own shares and so their offer value. It would start to seriously unattractive for its own holders who get to vote on the deal.

Already Crown holders would end up with at least 59 per cent of the merged entity (if the cash offer is fully taken up).

Crown directors are walking a tightrope.

Originally published as Crown Resorts directors bet the house on Star Entertainment