If a deal can’t be struck with its Hong Kong partners, which based on the current stand-off is increasingly likely, Star will need to pay $10m come midnight next Wednesday, and another $8m in cash in the following weeks.
Star said it is “unlikely” to be in a position to reach an agreement by Thursday’s deadline. There’s still another day to go, which in McCann’s mind offers plenty of room to strike an agreement.
It is understood that after more than three months, 90 per cent of the long form documentation for Hong Kong’s planned takeover of Brisbane’s Queen’s Wharf casino has been agreed too. However, it’s the final 10 per cent that’s been the sticking point all along.
That comes down to Star’s willingness to share sensitive financial data on the operations of Queen’s Wharf.
McCann is keen to remain on as long as possible as the licensed operator of the Brisbane casino, which will see it paid a lucrative monthly fee, while the Hong Kong partners Chow Tai Fook and Far East Consortium own the property as well as any losses the business generates.
As The Australian revealed last month, the Hong Kong partners have an entirely different view. They want Star out of Brisbane as soon as possible and have invited Crown Resorts, Sky City, Delaware North (the US owners of Darwin’s casino) and a Macau operator to submit an operating proposal.
But, for any of them to make an informed submission they will need more granular financial data. McCann doesn’t want to give this information up, namely because in the future Star will continue to operate a fierce competitor to Brisbane, the Gold Coast casino.
The hard line tactics reflects McCann’s well-rehearsed negotiating style since he took charge of the stricken Star last year. Hold out to the last minute and then clinch a deal. Like Donald Trump’s deal making, it involves lots of bravado, given Star rarely has the leverage.
The patience of Star’s long time Hong Kong partners has now run out and this is no way to do business. Their patience started getting thinner when Star got US casino operator Bally’s on-board as a backer.
Hong Kong still want a deal, Star’s main bankers see an exit from Brisbane as the way forward and the Queensland government just wants certainty for the thousands of workers and the city’s new tourism venture.
If Star doesn’t strike a deal for Brisbane, there are plenty hidden costs coming its way, with mounting operating losses in Brisbane likely add to the rate of Star’s cash burn. There’s amortisation charges starting to add up, more construction costs in Brisbane, and then there’s the monster $750m debt refinancing on Brisbane due by the end of December, with lenders set to demand more equity to be injected in.
All told, without an agreed deal to walk away from Brisbane, Star once again tips into negative equity.
Latest quarterly numbers issued by Star make for tough reading. The performance of the flagship Sydney casino is getting worse on a tough new regulatory regime in NSW. Queens Wharf in Brisbane remains in start-up and is generating losses.
At a fundamental business level the figures are even more worrying. Cash burn from operating activities is running at $74m in the past quarter, compared to a burn rate of $55.9m in the March quarter. Its only financing that has taking quarterly earnings losses to $27m.
Star has a cash cushion for now, helped by a recent flurry of assets sales and new cornerstone shareholders Bally’s and Bruce Mathieson coming on board. Combined, they now have a 61 per cent stake in the casino operator. Star has received around $300m since March from equity injections and side deals to help stabilise its operations.
At the current rate of quarterly burn and assuming it is no longer on the hook for the Brisbane operations, Star’s cash pile of $270m gives it almost 10 months of runway left.
There’s several very big unknowns. The financial crimes regulator in June applied to the Federal Court for a $400m fine which wipes out its cash. Austrac is unlikely to secure the full amount, but even a 50 per cent discount would still represent game over.
It’s the consequences of hanging on to the debt-heavy Brisbane property, however, which plays havoc with Star’s balance sheet.
Between Bally’s and Mathieson, it’s not certain if the two have the financial horsepower or the appetite to inject more even more funds into Star.
For Star, it’s a matter of two steps forward and just as many back.
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Star boss Steve McCann is once-again taking negotiations right down to the wire with the casino having until midnight tomorrow to strike a deal over the terms of its own exit from Brisbane. The issue is, McCann isn’t holding any aces.