A $9.3bn Melco takeover of Crown makes ‘strategic sense’, Macquarie says

A $9.3bn Melco takeover of James Packer’s Crown makes ‘strategic sense’, analysts say.

Lawrence Ho, co-chairman and chief executive officer of Melco. Picture: Bloomberg

Asian casino giant Melco could pay as much as $14 a share to take over the Crown Resorts group, valuing the company at $9.32 billion, as part of a deal that Macquarie analysts say makes “strategic sense”.

Melco last month acquired a 19.99 per cent stake in its former Macau partner for $13 a share, but Macquarie says the company is likely to mop up the rest of the holdings despite current market negativity.

“We do see the strategic rationale behind the transaction and believe investors are misunderstanding the revenue synergy potential,” Macquarie analysts wrote in a note to clients.

Melco’s expertise in servicing Asian VIPs creates an opportunity to improve Crown’s ailing VIP business, which as been softening since 2016, they said.

Melco’s chair and chief executive Lawrence Ho is currently in the sights of Australian regulators thanks to concerns over business links to his elderly father Dr Stanley Ho, one of the founding fathers of Macau’s casino industry.

Macquarie says probity on those issues is attainable in the next 12 months, which could prompt a tie-up within the same time frame.

“With 17 per cent upside to our $14 per share takeover scenario, implying 11 times EBITDA excluding Crown Sydney in FY20, we see an attractive risk versus reward trade-off,” its analysts wrote.

Macquarie also says Crown Sydney is under-appreciated by the market, saying the new casino could provide a 12 per cent earnings return on the $1.4 billion net cost of construction when it becomes fully operational in FY25.

Crown shares have been under pressure since Las Vegas casino giant Wynn walked away from a $10 billion takeover for the group — now trading at a 14 per cent discount to its highs when the deal was announced in April.

The Wynn deal was for $14.75 per share, which Macquarie says is difficult to rationalise. But a bid at $14 could be free cash flow neutral for Melco after $US30 million of cost synergies, it says.

The stock’s current levels are still at a significant premium to listed rival Star Entertainment Group, which earlier this year flagged a drop in VIP turnover. Macquarie says the premium is down to Crown’s M&A potential.

“Near-term, the earnings outlook is challenging with a soft domestic consumer and ongoing trade tensions impacting VIP,” analysts wrote.

“Both of these issues are cyclical and will improve in the medium term and possibly benefit Melco should they acquire Crown Resorts.”

Crown shares closed up 1.8 per cent yesterday at $12.22.