Star may still be breathing but its rescue just got complicated

Going, going … revived! Star Entertainment has survived a near-death experience and left a trail of disappointed corporate vultures who were lining up to pick up the spoils from administrators.

It may be too soon to brand Star as the “Lazarus” of the casino industry, after its 11th hour stay of execution on Friday. But what Star chief executive Steve McCann has conjured so far might yet elevate him to the status of corporate magician, even if the company’s long-term future remains unclear.

Bally’s Corporation has 19 casinos across the United States and has set its sights on Australia’s Star.Credit: Bloomberg

Star still cannot sign off on its accounts, so we are not talking about a rosy or even a risk-free future, and there is now a new twist in the tale that could forge an altogether new chapter in the saga of keeping the company afloat.

But Star’s reprieve on Friday, as it announced an agreement to sell its stake in Brisbane’s Queens Wharf property for $53 million, would be music to the ears of finance regulator AUSTRAC, which is in the throes of reaching a legal settlement that would leave the casino group to pay it about $300 million in penalties. Also overjoyed would be the NSW and Queensland state governments, who are staring down the prospect of losing the gravy train of taxes and securing the future of the 9000 or so staff that work at Star’s properties.

The rescue, announced on Friday, comprises a number of elements but only one of them (the Queens Wharf deal) appears to be legally set in stone. The first is a $250 million bridging loan from King Street Capital that looks to be well advanced and if agreed on will attract a hefty 15 per cent interest rate.

A larger, longer-term loan facility ($750 million to $940 million) is only a proposal at this stage, but a detailed one with drafts of a commitment letter, fee letter and term sheet. Star is yet to disclose the name of the lender.

While optimists would say Star now has a pathway to profitability, realists would argue its descent into extinction has not been completely averted.

This limbo would be of great frustration to asset vultures that had been waiting in the wings to pick at Star’s carcass. And on Monday, one of them finally showed its hand.

US-based casino operator Bally’s – run by New York hedge fund Standard General – came out of hiding to present a new rescue proposal – an alternative to the one that landed on Friday. It is a fair bet that Bally’s will now need to offer something far more generous than what it would have offered had it been negotiating with Star’s administrator.

There’s precious little detail in Bally’s offer to Star’s chair, Anne Ward, other than a proposal to underwrite $250 million of convertible notes and an openness to discussing a larger transaction. This proposal looks like it was drafted on the fly to get a seat at Star’s table.

Bally’s is seemingly not interested in buying bits of Star; it wants the whole business. As for McCann and Star’s lenders and investors, Friday’s offer gave certainty on the fate of Queens Wharf, which is easily Star’s biggest financial drain and therefore its albatross. Star owned 50 per cent of the asset alongside two Chinese joint venture partners, Far East Consortium and Chow Tai Fook, who will now take full control.

Jettisoning Brisbane gives Star some medium-term financial breathing space, and the $53 million in cash it receives will allow it to keep the door open for a couple of months.

It all helps, but the economics of running large integrated casinos in Australia no longer stack up, thanks to spending limits on punting and carded play. Which explains why Star’s latest pitch is to reinvent the business as a property play – a developer of nearby and associated assets.

McCann is not reinventing the wheel here; James Packer essentially paid for a large part of Crown Sydney by developing and selling ultra-high end apartments. Whether this is a long term viable solution is yet to be clear.

Casinos need to be able to wash their own face, despite being hogtied by regulation.

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