Blackstone lays out cards for Crown’s future

As the Crown board hunkers down to deal with requests from Victoria’s royal commissioner, its future — in a bizarre way — looks more ­assured than it has for some time.

Crown’s Melbourne and Perth operations are now the subjects of separate royal commissions. Picture: AFP

As the Crown board hunkers down to deal with requests from Victorian royal commissioner, Ray Finkelstein QC, its future — in a bizarre way — looks more ­assured than it has for some time.

While Crown won’t get an easy ride from Finkelstein, it is more than capable of handling any requests he might make in terms of the sensitive issue of problem gambling that the commissioner has raised this week.

Crown still has to reply to a second letter sent by Finkelstein about a number of issues (it has already replied to his first), but he made it clear this week that he was not going to reinvent the wheel and spend his inquiry going over the same ground that former NSW Supreme Court judge Patricia Bergin SC did in Sydney.

It also seems that, at long last, a credible potential buyer is on the horizon in US-based investment giant Blackstone, which went public with its long-held intentions in Monday’s ASX release.

James Packer appearing at the NSW Casino inquiry via video link.

There is a long way to go, and Blackstone’s approach is “non binding”, but at least Crown’s shareholders now have a baseline “indicative” offer of $11.85 a share to deal with, valuing the company at $8bn.

Blackstone appears to have been eyeing Crown for at least a good two years.

It bought a 9.9 per cent stake in the company from James Packer’s former partner Lawrence Ho’s company Melco in April last year for $550m (a low $8.15 a share) — a move made with the clear intention of being a player in Crown’s future.

But it would have been alerted to a possible buy-in opportunity with Crown’s announcement of an approach from the Las Vegas-based Wynn group in April 2019 (a deal mooted to be worth $14.75 a share, but one that was quickly dropped).

Although it might have preferred to stay below the radar for a bit longer, given the regulatory reviews Crown is still dealing with, Blackstone’s intentions have now become public.

For Crown’s part, having had a credible approach, it could not hold off going public in the highly sensitive continuous disclosure market in Australia, with regulators in three states putting it under the spotlight.

The ball is now in the court of the Crown board on its response to the offer. It inevitably will say it is not enough.

The Crown board may well be a bit busy with the immediate challenge of answering questions from Finkelstein, who made it clear this week that he would not tolerate delays, given the tight deadline of completing his report by August 1.

But the tone of Crown’s response to the approach from Blackstone will indicate if it is prepared to start dancing.

The Blackstone announcement will have the effect of flushing out any other offers or suitors who may be interested in Crown.

In practical terms there are none — although there may be a part for Sydney rival Star, which operates a casino at Sydney’s ­Pyrmont, to play in some form.

Star is not commenting on suggestions it is interested in Crown.

Founded in 1985 by New York businessman Stephen Schwarzman, Blackstone has become a global alternative investment powerhouse with more than $800bn in assets under management in areas including real estate, private equity, hedge fund investing, credit and distressed debt.

The firm has been operating in Australia for more than a decade, already owning $16m in assets in the country, including a diverse property portfolio, with plans to further expand its operations here.

Headed by former Macquarie banker James Carnegie (son of the late Melbourne corporate leader Rod Carnegie and brother of investor Mark Carnegie), the Australian operations are here to stay, with long-term plans.

While Blackstone’s approach to Crown can be considered opportunistic, given the fact that Crown shares have been hit by COVID-19 shutdowns and regulatory reviews, its intentions are long-term. A fly-by-night or a corporate raider it is not.

The approach is not a hostile deal and cannot succeed without the board’s support.

It is understood that its approach to Crown would involve a scheme of arrangement, which means that the Crown board would have to approve the deal and then recommend it to a meeting of shareholders.

Given the need for 75 per cent approval for scheme of arrangements, it would need to be accepted by major shareholder Packer, who still has 37 per cent of the company and has been on ­notice as a seller for some time.

While Blackstone’s approach is contingent on Crown retaining its licences to operate in Sydney, Melbourne and Perth, this now looks likely and it now appears the deal will come down to price.

Will Blackstone meet Packer’s expectations in a deal that could solve a lot of problems for him and the company? Or are Packer and the board prepared to walk away from a genuine suitor in the hope of getting more money and to look for other alternatives that clearly have not yet emerged?

While some say Crown is a property play for Blackstone, given its strength in real estate in prime locations in Sydney, Melbourne and Perth, what is not as well known is that Blackstone has a track record in the gaming industry as a licensee in its own right. It is understood that, far from having any short-term plans to slice the company up into a property company and gaming company, Blackstone is keen to roll up its own sleeves and ­manage Crown’s gaming operations, using the expertise it has built up around the world, if it succeeds in the deal.

Blackstone bought a Spanish gaming company called CIRSA, which has operations in Europe and Latin America, in 2018 in a deal rumoured to be worth more than $2.4bn.

The deal securing Spain’s largest casino company, which operates 147 casinos around the world, gave Blackstone entry to both the ­European and Latin American gaming market.

Ray Finkelstein QC will conduct Victoria’s royal commission into Crown.

It also has a gaming licence in Nevada, having bought the partly finished Cosmopolitan on the Las Vegas strip in 2014, in a deal reported to be worth $2bn.

It has since invested $600m in finishing and upgrading the property, which has about 3000 guest rooms, and has rewritten its ­labour deals with its staff of several thousand.

The Cosmopolitan deal can be seen as evidence of Blackstone being a long-term player in the market that is willing to repair and revamp ­distressed properties with some well-known or marquee assets.

This is different to its approach in October 2019, when it joined with MGM Resorts to buy the real estate asset of the Bellagio (think film Ocean’s Eleven) for almost $5bn.

Blackstone owns the property, while MGM Resorts runs the gaming side, paying Blackstone rent.

Blackstone also owns the underlying properties in the MGM Grand and the Mandalay Bay in Las Vegas.

Crown executive chair Helen Coonan. Picture: Adam Yip

In Crown’s case, its properties are not run down — certainly not the brand new property at ­Sydney’s Barangaroo that opened in late December and is attracting plenty of diners and sightseers.

What the company needs are management changes and strengthening of its internal processes and governance in a way that will help Crown in its negotiations with regulators.

Well experienced with gaming regulators, it is understood that Blackstone has been in active discussions with the regulators in all three states in which Crown is ­operating.

As is full well knows, gaming regulators do not like any sur­prises.

The downside for Blackstone — and one that, one could argue, depresses Crown’s price — is that it looks like junket operators, which have traditionally brought in cashed-up high-rollers to Australia, will be banned, at least in NSW and perhaps Victoria.

This will hold down potential profits from the glory days when Packer was envisioning his casino at Barangaroo as a haven for cashed-up Chinese and Asian high-rollers.

Just how fast Blackstone moves will depend on the response of the Crown board.

But if the deal were to be finalised in a few months, Blackstone could help supply key roles in Crown, including a new chief executive, following the departure of Ken Barton, and a new chief financial officer.

There are miles to go before any deal is finalised, but at least Crown now has a suitor that is both credible, cashed-up and that looks set to be able to pass muster with Australian regulators.