A star is torn: How Star is playing an existential game of poker

Steve McCann, a one-time world-ranked poker maestro and chief executive-elect of the financially flailing Star Entertainment, is engaged in a do-or-die-stakes corporate poker tournament. Around the table, he sits with the company’s lenders, investors, regulators and two state governments.

Putting his poker face to good use, McCann met these stakeholders over the weekend. In what could only be described as a confounding move, he laid his cards on the table.

The Star’s chief executive, Steve McCann, is in the middle of a high-stakes game of corporate poker.Credit: Dominic Lorrimer

Unsurprisingly, it was a shocking hand.

This pitch will certainly put paid to the adage that casinos are a licence to make money.

Over the past 18 months, shareholders have bailed out this company – not once but twice – by pumping in about $1.6 billion in equity. They would be justified in asking how Star is again facing an existential crisis.

It’s difficult to accurately apportion blame. Cost and time overruns on its Queen’s Wharf project in Brisbane is a biggie, the expense of reforming the culture and exorcising the misconduct of old is another, while one would need to lay some blame at the feet of the previous board and management.

The company is experiencing a liquidity crisis and is in the midst of an earnings crisis.

McCann’s first trick has to be to convince the stakeholders that they all have skin in the game and therefore a reason to support his salvation plan.

The second is to produce a sufficiently credible plan that provides the shareholders and lenders with a road map to recover their investment – and one that will give regulators sufficient comfort that the casinos can reform and retain its licences. The governments in NSW and Queensland need to know these large employing casinos won’t close and upset their local economies, and can only again become tax-milking machines.

The bottom line is McCann needs to have someone inject some money into Star, enough to keep the doors open until he can attract the cost base and sell assets.

To add to all this complexity, the current malaise in Star’s earnings – which really started to hit hard in the current financial year – since the start of July has other ramifications.

The cost of reforms and newly implemented regulations around cashless gaming and carded play (which requires patrons to turn over lots of identity information) is a revenue retarder for the casino. It is disproportionately detrimental for Star over Crown as the former has poker machines.

Also when a company is making little or no profit, there are accounting ramifications – including an auditor-required need to take major write-downs on the value assets – and, in Star’s case, this is estimated to be around $1.4 billion.

And that’s a big number given the market capitalisation of Star (which is the amount the stock market values it at) is now $1.3 billion.

The bottom line is McCann needs to have someone inject some money into Star, enough to keep the doors open until he can attract the cost base and sell assets.

Shareholders are less than enthusiastic at such a prospect, thanks largely to having tipped in $1.6 billion over the past 18 months as the cash-thirsty company undertook two rapid-fire equity raisings. This equity degustation means shareholders have zero appetite to tip in more share capital.

Traditional bank lenders will be equally underwhelmed at stepping up to the plate. This explains why the bets are on McCann to drum up interest for raising $300 million via convertible notes, which are quasi-debt/equity.

And if I were a betting person, I would put Bruce Mathieson as the most likely investor to dive into this investment. Mathieson is already the largest shareholder in Star, and regardless of all the casino company’s missteps and financial trauma, he appears to retain faith that the company will recover.

Billionaire Bruce Mathieson is the most likely investor to dive into Star.Credit: Arsineh Houspian

Once these notes convert, Mathieson could significantly boost his stake in Star – possibly to a controlling position.

But to issue convertible notes, the lenders will need to give the company some space on the lending covenants – either loosen or extend them.

Part of McCann’s plan is to get help from at least the NSW government – a bit of tax breathing space.

Star already received a bit of help last year from the NSW government, which delayed the imposition of additional taxes that had been on the drawing board. In return, Star had to ensure it continued to employ 3000 people at its Sydney casino.

McCann needs to manage all these stakeholder players and convince them that if he throws in his cards, they all lose.

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