Crown Resorts royal commission findings could ‘inhibit’ takeover attempts

The findings of Victoria’s royal commission into Crown Resorts means the casino group is a less attractive takeover target, analysts say.

Crown Resorts is less likely to be the target of future takeover attempts, gaming analysts say, as the recommendations of a Victorian royal commission into the group look set to constrain its ability to unlock value for shareholders. Picture: Getty Images

Crown Resorts is less likely to be the target of future takeover attempts, gaming analysts say, with the recommendations of a Victorian royal commission into the group set to constrain its ability to unlock value for shareholders.

Crown was found unsuitable to operate its Melbourne casino in the commission’s final report released on Tuesday, but has been given two years to reach suitability under the supervision of a “special manager” with extensive powers including the ability to veto board decisions.

The report also proposed mandatory regulatory approval for any new shareholder with a stake greater than 5 per cent of Crown, while recommending “harmful” major shareholder James Packer be forced to sell down his 37 per cent stake by 2024.

Credit Suisse analyst Larry Gandler said the likely sale of Mr Packer’s sake could put Crown “in play”, but the special manager and other recommendations that constrain Crown’s control over its flagship asset “could inhibit the ambitions of takeover suitors”.

One potential suitor is US private equity giant and Crown shareholder Blackstone – which made two unsuccessful tilts at a takeover earlier this year.

Another is rival casino operator The Star Entertainment Group, which lobbed and then withdrew a $12bn merger proposal.

Both are attracted to the value that could be unlocked through launching a sale and leaseback of Crown’s three Australian casinos, with The Star announcing the sale and partial leaseback of its Brisbane Treasury casino and hotel on Wednesday.

But Mr Gandler said it was unlikely the special manager would permit Crown to make such a massive move, dissuading Blackstone and other potential private equity players.

“The appointment of a Special Manager, in our view, means at least two years before a takeover suitor can execute a sale and leaseback,” he said in an analyst note.

“Private equity funds are hard-nosed about meeting IRR (internal rate of return) objectives and time delays in executing asset sales greatly impact the IRR calculation.”

The Victorian government has named Stephen O’Bryan QC to the role of special manager and has introduced legislation to establish his position, while indicating it will take its time before implementing each of the commission’s 33 recommendations.

Mr Gandler said the recommendation Crown Melbourne’s senior management and board be able to operate independent of parent company control would reduce Crown’s attractiveness if implemented as intended.

“This could be quite constraining for takeover suitors and holding companies to implement strategies in that the recommendation specifies that Crown Resorts and Crown Melbourne accept that a casino operator should have an independent board and, if there is a holding company, that the board should be independent of the holding company,” he noted.

Commissioner Raymond Finkelstein of the Victorian Royal Commission into Crown Resorts has recommended a number of sweeping changes to how the casino group is regulated. Picture: NCA NewsWire/David Crosling

Crown has also become less attractive to international suitors like US casino giant Wynn Resorts, Mr Gandler said, as Australian and Asian regulators continue to crackdown on international high rollers over money laundering risks.

“When one considers the takeover situation of other former suitors of Crown Resorts, there have been changes,” Mr Gandler said.

“The Chinese government has become much more restrictive about VIP play in the Asian region impacting synergy between Crown and other Asian operators.”

Some Crown shareholders believe the group remains an attractive takeover target despite the Victorian commission’s findings and the potential of further regulatory changes emanating from a separate Crown royal commission in Western Australia.

Simon Conn, senior portfolio manager at Crown shareholder Investors Mutual said Blackstone and The Star could remain interested parties – even as the latter comes under regulatory scrutiny over its own money laundering controversies.

“The strategic nature of (Crown’s) assets are probably not reflected in its share price,” he said.

“There’s a lot of value that can be extracted, so it could still attract interest from someone at Blackstone.

“Obviously Star now has had a few questions raised about their processes … I think they need to address the concerns with the regulators before they can come back, but a merger of the two groups is not off the table and may be something explored at a later date.”

Analysts at Macquarie said they would not rule out Crown pursuing value creation opportunities on its own, while The Star may come back to the table.

“We think that the priority for Crown Resorts remains ‘transformation and remediation’ but would not rule out scoping of shareholder value creation opportunities including potential capital management – given balance sheet capacity – or reviewing OpCo / PropCo options.

“There is also the possibility that Star Entertainment reassess a merger proposal with Crown Resorts given greater regulatory certainties.”

Shares in Crown closed at $10.30, down 1.9 per cent, after rising 8.7 per cent on Tuesday.