Bids on hold amid Crown uncertainty

Commissioner Ray Finkelstein has thrown an additional a spanner in the works with new questions about whether Crown may need to restructure its operations if it is to continue to hold a licence in Victoria, making sure it is run from Melbourne.

Crown Resorts shareholders are faced with increasing uncertainty following this week’s hearings of the royal commission in Victoria.

A few months ago, Crown was in the apparently comfortable position of having two suitors – US private equity fund and major shareholder Blackstone and its Sydney rival, Star Entertainment – and looking forward to the NSW Gaming Authority finally giving the tick to its Sydney licence.

It stoutly rejected the overture from Blackstone and has left Star waiting on its verdict as chairman Helen Coonan hoped to tough it through, with regulators and inquiries, in NSW, Victoria and Western Australia, leading a “new Crown” and keeping Crown an independent company.

But at the end of the official witness hearings for the royal commission in Victoria on Friday, not only is the future of Crown’s ­licence to operate in Melbourne still under a serious cloud, commissioner Ray Finkelstein QC has thrown an additional a spanner in the works this week with new questions about whether Crown may need to restructure its operations if it is to continue to hold a licence in the state, making sure it is run from Melbourne and not reporting to a holding company.

Questions have also been asked about whether Crown having a casino in Sydney could raise issues for its licence in Melbourne, if it could be seen to be detrimental in any way to Crown Melbourne – its Victorian licence being conditional on Crown not doing anything that could be seen to harm the interests of Crown Melbourne.

While the would-be bidders are watching the process with interest, it is now less and less clear what the future structure of Crown might look like post the outcome of the Victorian royal commission, which is due to report by October 15.

Can Crown reform itself subject to strict conditions to be imposed by the Victorian casino regulator (itself now under heavy scrutiny), completing a transformation from the “old Crown” to the “new Crown”, with its current assets intact?

Is there a possibility that it loses its gaming licence for its Melbourne casino – still the jewel in its operations – and keeps its operations in Sydney and Perth? Or could it be forced to see a break-up of the company by having to sell off its Sydney operations as the price for continued operation in Victoria?

Victorian Premier Dan Andrews has already made it clear this week that “the prospect of Crown losing its licence is very, very real”, particularly if it were recommended by Finkelstein.

But long-time casino regulation adviser David Green, who has worked in Adelaide and lived in Macau for 14 years before moving to Melbourne, argues that this prospect might sound good in the current political climate but faces serious practical problems.

He argues that Crown’s ownership of the hotel, and control of other properties on the site including the carparking, make it very difficult for the licence to be torn up and handed to another ­operator.

“It would be very difficult for the government to cancel Crown’s licence and retender it,” Green told The Weekend Australian.

“The two hotels are owned by Crown and the site is subject to Crown’s leases.

“It is impossible to operate a destination casino without hotels, food, retail and convention facilities. This has been overlooked.

“The Victorian government doesn’t seem to have an exit strategy. They can offer the licence to a hundred operators but no one is going to take it on without access to hotels, carparking and retail space.”

After this week, different scenarios are being considered for the future of Crown.

Finkelstein made it clear that after years of what has appeared to be weak regulation of Crown, Victoria Inc needs to reassert its control of things. “When this ­casino was set up it was a Victorian casino, Victorian run, Victorian operated, with Victoria’s economic and social interests as its principal objective,” Finkelstein said.

“That’s the model agreed between the government and the ­casino.”

He said the current model – where Crown has a chief executive of its Melbourne operations (currently Xavier Walsh) who reported to a chief executive of the listed company (currently Sydney-based former Lendlease chief executive Steve McCann) – “might have worked” but he suggested that “it might not have been legal.” Just having the chief executive of ASX-listed Crown Resorts move to Melbourne was not enough, he said.

“All the senior management and any executive director (of Crown Melbourne) actually is required by the agreement to live in Melbourne,” Finkelstein said.

“It’s meant to be a Melbourne-run show … that is, the Melbourne people look after Melbourne and don’t care what’s happening in Perth or Sydney.

“For me, it’s a serious problem which inevitably has to be ­addressed.

“You should assume that I have in mind making sure that the subsidiary board is not a subservient organisation, that is, this subsidiary board should as the agreements contemplate and the legislation contemplates, it should run Victoria.

“No parent company or ­holding company should run ­Victoria.”

Finkelstein said he would recommend that Crown’s plans to centralise the operations of all three operations – in Sydney, Melbourne and Perth – under the one head office “should be made impermissible”.

“This is parochial as it gets,” he admitted frankly.

“Victorians for Victoria.”

While Crown Resorts CEO McCann tried to argue that ­having a casino in Sydney could enhance the interests of Crown Melbourne by allowing cross promotion and Crown gamblers a range of venues (as well as having Crown Sydney promoting tourism in Victoria), Finkelstein threw up the fact that Crown had promised NSW that its Sydney casino licence would generate as much as a billion dollars in extra revenue for the NSW government over 10 years, which could take away from revenue going to the Victorian government.

“That’s taking a lot of revenue out of Melbourne, isn’t it?” he said.

McCann said Crown Sydney was a much smaller operation than Crown Melbourne, declaring that Melbourne was its key business and describing Sydney as “a small gaming facility with a nice hotel”.

With Sydney-based Star already a bidder for Crown, it is not out of the question that Star could easily put its hand up to buy Crown’s operations in Sydney.

Star’s upper hand is that it already has regulatory approval to operate in Sydney as well as Queensland, while Blackstone, whose bid was soundly rejected by Crown, could still face a protracted probity review by NSW regulators if it presses ahead with its pursuit.

At its most optimistic, Star, which made a part cash offer of $12.50 a share, argued that its bid could be seen to be worth $14 a share provided it could implement a range of synergies, while Blackstone was bidding $12.35 a share.

Oaktree Capital was also offering Crown $3bn in financing to buy out James Packer’s 37 per cent stake in the company.

Crown’s shares reflected the optimism in May, with its shares hitting more than $13.

This week, as uncertainty increased over its future, they fell below $11.

But Crown’s long-suffering shareholders, including Packer, look set for further months of uncertainty, at least, over the company’s future.

Meanwhile in the US, there are reports that Packer, who has agreed to keep his hands off the operation of Crown, is becoming increasingly frustrated with his inability to sell his stake.

“James Packer must be watching with rising unease,” says Green.

“The speculation about whether the Melbourne licence will be pulled is damaging the value of his shareholding.

“What Finkelstein has uncovered is a culture which is deeply ingrained in the organisation.

“It is a culture of combativeness with the regulator and trying to pull political strings.”

Green warns that if Crown does lose its licence to operate in Melbourne, it could trigger a class action by shareholders.

In a theoretical question to a witness on Friday, Finkelstein raised the prospect of a cleanskin outsider coming in and taking over Crown, bringing in a new approach to operating the business and dealing with regulators.

After two years of battling regulators and critical media, the outlook for Crown’s shareholders is even more clouded than ever ­before.