Why Star’s Brisbane deal with its Hong Kong partners collapsed

Star has just five days to salvage its Brisbane lifeline, or face crippling debts once again. Picture: Steve Pohlner

Star’s two Hong Kong partners want the trouble-prone casino out of Brisbane, and quickly. Star wants to hang on to Brisbane, given the lucrative income stream the new casino now represents.

This became a sticking point that dramatically boiled over, with Star’s long-time partners in Queensland taking the nuclear option by publicly threatening to blow up a rescue deal struck in March that gave the casino its financial lifeline.

It’s fair to say relations between the two Hong Kong partners and Star have soured since then, and even more since Star’s new controlling shareholder, the US-based Bally’s, came on board. Just last week, Star’s shareholders overwhelmingly backed Bally’s and Bruce Mathieson to take a combined 61 per cent stake in the struggling casino.

Now, Hong Kong’s Chow Tai Fook and Far East Consortium have given Star until the end of this week to reach an agreement on Brisbane. No deal, and all bets are off.

The reality is, Star’s situation is not a desperate as it was back at the start of March when it struck what was then a pretty terrible deal to secure its funding lifeline.

Times up for Star in Brisbane, with its Hong Kong partners keen to get a new operator in. Picture: Steve Pohlner

Star remains financially very weak today, however with $133m in new cash coming through the door immediately from Bally’s and Mathieson as well as another $58m from the sale of its Sydney events centre, it is no longer on life support.

At the time, Angus Aitken of Aitken Mount Capital Partners described the Hong Kong bailout as the “stupidest deal” he had seen in 25 years of stockbroking.

Under the original terms, Star would offload its 50 per cent share in the brand new $3.5bn Queen’s Wharf casino in Brisbane in exchange for taking full control of the new hotel towers and development sites around its Gold Coast casino.

While Star stood to lose control of its prized asset in Brisbane, the upside was survival by extracting itself from crippling debt repayments on the property, including a $1.4bn refinancing due later this year.

At the same time, the agreement sees Star become an operator of the new Brisbane casino, getting a fixed fee of $5m a month, increasing to $6m a month from June next year. Hong Kong would also assume employee costs and entitlements.

From Star’s vantage, as an operator not an owner, suddenly Brisbane moves from being a burden to a financial winner and, it made sense for it to hang on to that income stream as long as possible.

However, the original deal was signed before Bally’s was on the scene, and the US operator has said it wants to “change everything” around how Star runs its business.

It is understood Hong Kong is concerned that Bally’s ‘cheap and cheerful’ offering may not be the image it wants to project at its sparkling new Queen’s Wharf casino. For that site to be a success, Hong Kong sees it as an international-grade project, designed to compete against the likes of Crown Resorts in Sydney and Melbourne, as well as casinos in Macau and Singapore (although without the regulatory risky high-roller business).

Hong Kong needs Star to continue operating the business for now for the sake of continuity and licensing, but wants Star to get moving and help find another partner.

To do this, Star will need to share sensitive financial information, possibly with rivals Crown and Sky City.

For Star, $5m a month coming in the door is also helping to absorb losses in other parts of the empire, such as Sydney, while buying time to get its balance sheet in shape.

Bally’s backer Soo Kim. Picture: Getty Images.

Bally’s founder and backer Soo Kim is on the record, including to The Australian, saying he’d prefer that Brisbane remains part of the Star portfolio – and why not? The construction of the world-class casino and upmarket hotels is largely done and costs can be shared across three sites (Sydney, Brisbane and Gold Coast) rather than two. For its part, Star is firmly committed to the original terms of the deal, including an exit as owner. There’s good reason why.

If it stayed, Star would need to come up with $750m in new debt, its share of the refinancing of the Queen’s Wharf loan, and this will involve a consortium of new bankers. Given the state of the Star’s financial health, interest costs will be significantly higher than today.

At the same time, Brisbane flips from being a cash cow to another marginal earner while it is in ramp-up phase. Finally, Star would face repaying approximately $40m in funds Hong Kong has paid to keep the casino open since March and equity accounting losses it has absorbed. This would be on top of the $10m it injected as a cash lifeline in March (also due to be repaid).

Those close to the talks for Star said the Australian casino was taken by surprise at Hong Kong’s threat to walk. They said Star has been highly accommodating with additional demands Hong Kong has been putting on it since the initial agreement March.

Not only is the speed of transfer a stumbling point and demands for Star to find a new operator, there’s additional uncertainty what the actual handover looks like – including an already agreed to $225m future earn-out mechanism. Star has countered this, arguing there’s “a limit” to how flexible it can be through ongoing talks.

The latest drama continues to go to Star’s enduring credibility problem. Chair Anne Ward gave no sense to shareholders during last week’s general meeting that there were real sticking points. When asked why the final agreement with Hong Kong was taking so long (it was initially planned to be completed by the end of April) she replied: “We are very close to completing that process … We would expect those documents to be signed very soon.”

However, it is understood the major differences between the two camps has been building for weeks and the decision by the Hong Kong partners to walk away had been well telegraphed. Just last Friday, Far East Consortium joint managing director Wendy Chiu said commercial terms have to add up and there were “risks” to the deal in its current form. Star says it was caught by surprise and feels this is an extreme negotiating tactic.

Star might have found itself in a lifeboat, but it is still taking on water. And a very big unknown is the size of a looming Austrac fine, with the regulator asking the Federal Court to hit it with $400m. A decision on that is likely this year.

Mathieson has privately told Star all bets are off if the fine comes in that big and Bally’s simply doesn’t have the balance sheet to pay for it. And now Star has lost the goodwill of the only old friends it had left.

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