Crown Resorts rejects Blackstone bid, Star merger plan still in play

Crown Resorts did not grant Blackstone access to due diligence before rejecting its $8bn offer, as it has yet to form a view on rival Star’s merger plan.

Regulatory uncertainty still surrounds the future of Crown’s Barangaroo casino in Sydney. Picture: Nikki Short

Crown Resorts did not grant Blackstone access to its data room, preventing the US private equity group from refining its $8bn takeover bid for the casino giant, while leaving the door ajar from a potential merger from rival Star Entertainment.

Crown formally rebuffed Blackstone, which already owns 10 per cent of the company, on Monday morning as it braced itself for the first hearings of a Victorian royal commission into its operations.

The James Packer-backed casino group said Blackstone’s offer of $12.35 per share — increased from an initial bid of $11.85 per share — “undervalued” Crown, which has seen its earnings more than halve during the COVID-19 pandemic.

“The board has unanimously concluded that the revised proposal undervalues Crown and is not in the best interests of Crown’s shareholders,” the company said.

Blackstone declined to comment. But The Australian understands that Crown did not grant Blackstone access to its data room to conduct due diligence and refine its offer, which was about a 25 per cent premium on Crown’s undisturbed share price.

Blackstone aimed to soothe investor concerns over regulatory risks from two royal commissions into the casino giant being run in parallel in Victoria and Western Australia, believing its all-cash offer had minimal risk and was effectively a bird in the hand to Crown investors.

But Crown, under executive chairman Helen Coonan, believes it can turn the group around and unlock more value for shareholders, particularly once the COVID-19 pandemic subsides. In statement to the ASX on Monday, Crown said coronavirus had hammered earnings before interest, tax, depreciation and amortisation to $142m in the half year to December 31, 2020 — the lowest in any year since Crown was listed in 2007 — versus $381m in the previous corresponding period.

Blackstone had also pitched its offer to shareholders by stating it would receive 100 per cent probity approval from state-based casino regulators by the third quarter of the year, meaning it would assume the regulatory risk from the findings of two royal commissions into Crown in Western Australia and Victoria.

But last week the chair of the NSW independent Liquor and Gaming Authority Philip Crawford said he had given no such indication to Blackstone, pledging not to “cut corners” in approving the US private equity giant, which operates numerous casinos worldwide.

Consequently, Crown said on Monday the board was unsure of Blackstone’s indicative timeline for getting probity.

“The board also carefully considered the conditions of the revised proposal, including the regulatory approval conditions,” the company said.

“Despite Blackstone’s modification of these conditions, the board believes there is significant

uncertainty as to the timing and outcome of the regulatory approval processes.

“As a result, the conditions of the revised proposal as currently understood present an unacceptable level of regulatory uncertainty for Crown shareholders.

“The potentially long time frame involved in implementing the revised proposal and Blackstone’s requirement that any dividends paid to Crown shareholders during this time would be deducted from the indicative offer price of $12.35 per share.”

Blackstone also faces competition from Crown’s smaller rival Star Entertainment, which has proposed to merge with Crown using a mix of scrip and cash, worth $11.28 to $11.59, depending on the balance between these elements.

But the ace up Star’s sleeve is its argument that the merger will unlock substantial value for all shareholders with estimated pro-forma values per share of more than $5 for itself, and more than $14 for Crown.

To hit that target, Star would embark on cost-cutting, a massive property sale and leaseback deal and a stock rerating: hinging on a lot of hope that things will fall into line, compared with Blackstone’s sure bet of an all cash offer.

But JMorgan analyst Donald Carducci said Crown, despite facing regulatory risks from three inquiries in three states, was far from a “forced seller” but could be in play if Blackstone and Star joined forces.

“For a transaction to eventuate, it likely needs to start in the $14-range, both Blackstone and Star could put their balance sheets together to make this happen,” Mr Carducci said.

“Blackstone can, and currently operates in the US, be a PropCo (property company), while Star can, and has indicated they want to, be the OpCo (operating company). Doing the work on what Crown is worth based on their 2016 proposed REIT-IPO, the valuation gets Crown to $15 quickly.

“It would be interesting if Blackstone, having been rebuffed by Crown, dusts off the playbook and does the numbers on Star. There’s clear value in the property for Crown, and similarly for Star, so if Crown is not interested, Star is an option which has already shown their hand and willingness to do a PropCo.”

In a separate statement Crown said the board had yet to form a view on the merger proposal from Star, which consists of a scrip component of 2.68 Star shares for every Crown share and a $12.50 cash alternative capped at 25 per cent of all Crown shares.

“The Crown board has not yet formed a view on the merits of the merger proposal,” the company said.

“To facilitate the Crown board’s assessment of the merger proposal, Crown has requested Star to provide certain information to allow the Crown board to better understand various preliminary matters.”