Property spin off supercharges Star’s $12bn Crown dream

Getting top dollar for a glittering empire of casino properties would be high on the agenda after any Star-Crown tie up.

The Star CEO Matt Bekier pictured on the balcony of The Sovereign Room at The Star casino in Pyrmont with the Crown tower at Barangaroo in the background. Picture: Toby Zerna

The jewels in the Crown Resorts property empire could be combined with the best properties owned by The Star and spun out to create billions of dollars in value while being leased back to the powerful merged entity.

The real estate spin-off is a key element of the $12bn merger plan by Crown’s fierce rival and a key differentiator from plans by private equity suitor Blackstone that would keep the property in-house.

The prospect of The Star winning the backing of investors, most notably 37 per cent Crown shareholder James Packer, and jumping multiple regulatory hurdles, already has property managers excited about what would be the largest and most glamorous property play.

The Star bid is premised on securing a dramatic re-rating of the merged entity from listed investors, locking in synergies by combining back offices and a hefty uplift from spinning off the bulk of the combined property portfolio.

Crown has historically traded at a forward earnings multiple of about 11.2 times, with this partly buttressed by the promise of lucrative junkets from China once its signature property in Sydney opened.

While these dreams have been dashed, Crown’s multiple was well above The Star’s multiple of about 8.5 times, partly reflecting the lower quality of its earnings and casinos.

Star is now arguing that its trading multiple will gravitate towards the higher multiple and is stacking in a conservative estimate of the synergies from a merger of $150m to $200m.

This would be a benefit of just 4 per cent, whereas other casino mergers have generated about 12 per cent.

The merged entity would supposedly get a $1.35bn uplift from a re-rating from investors and about $2bn once the synergies are capitalised.

But one of the biggest kickers is from switching to an operating company-property company structure, which Star chief executive Matt Bekier indicated could provide an uplift of about $2bn when quizzed by analysts.

Sceptics doubt whether a merged entity would be quickly re-rated and synergies are as conservative as Star implies, and wonder how the property spin-off would work.

Crown shareholders could go for Star’s scrip and cash offer as the re-rating and synergies could kick in over the next year with the property deal to follow. Unlike the stand-alone companies a merged group is being pitched as having sufficient scale for a potential sale and leaseback of properties, in co-ownership with one of the big institutions that are making the running in buying assets globally.

The Star describes the bundle of casinos as a unique opportunity to invest in a portfolio of irreplaceable properties in highly sought-after markets.

The unlisted fund would include gems like the Crown complexes in Sydney, Melbourne and Perth as well as The Star facilities in Sydney and on the Gold Coast.

Global pension funds are chasing alternatives to shopping centres and even office buildings.

Having a stake in a portfolio of market-dominant casinos and associated hotels on long-term leases would bring the sharpest capital to the table as it would be one of the best opening trades in the wake of the pandemic.

The Star is pitching the combined entity’s holdings as about 30 hectares of land situated in high-traffic precincts across Australia’s major cities.

The combined group comprises integrated resorts in Sydney, Melbourne, the Gold Coast and Perth with large catchments in tourism hubs.

The merged company would keep a significant ownership and alignment through taking a 50 per cent interest in the vehicle.

The initial structure excludes Queen’s Wharf Brisbane and Sheraton Grand Mirage, which are jointly owned by The Star.

But longer term it provides an opportunity to leverage The Star’s joint venture partners, Chow Tai Fook Enterprises and Far East Consortium, and their international networks.

The vehicle would also be able to leverage the joint venture development pipeline across the combined portfolio, including a major site in Melbourne.

“I can see the logic in it and definitely see the value; it all comes down to a matter of price and whether the potential value is there,” Jefferies analyst Simon Thackray said.

He is tipping a drawn takeover battle as each suitor brings different offers to Crown shareholders.

“There are more acts in this drama than we’ve currently seen,” he said. “The Star merger proposal is really just a logical iteration of what has been happening since the Blackstone bid was lodged.”

The Star’s move could also be viewed as a defensive play to shore up its position in Sydney as it faces the prospect of fierce competition from Crown once its casino is permitted to open.

The gaming group‘s operational skills, at one point, were considered a potential drawcard for Blackstone, which could have used it to run Crown’s casinos.

Blackstone has since indicated its plans to operate the casinos as integrated resorts and maintain property ownership rather than spin off the portfolio.