An Echo sounds through VIP room
What was shaping as a cakewalk for Crown is more challenging now there are two proposals for the government to consider in the second stage of the process.
Crown's proposal for a new high-roller-only facility inside a $1 billion, six-star hotel in the Barangaroo development is predicated on Echo's the Star losing its exclusive status as Sydney's only casino as scheduled in 2019.
Echo's proposal for an expansion of its more broadly based casino and entertainment complex at Pyrmont is conversely predicated on exclusivity being extended beyond 2019. Its casino licence runs until 2093, and in 2007 it negotiated an extra 12 years of exclusivity.
Only one can be selected, in other words - the government could reject both proposals, but is not likely to do so - and the government advisory taskforce headed by David Murray has been asked to come up with a recommendation by the end of next month.
Bidding tension tends to produce higher prices. In this case, they could be collected directly by the government in the form of higher licence fees or higher taxes on gaming revenue, or indirectly through project features such as the "local transport initiatives" NSW Premier Barry O'Farrell says Echo is foreshadowing in its proposal to construct a "globally competitive integrated resort" at Pyrmont.
Whether bidding tension works for shareholders is another question. Concessions could squeeze the economics of the projects.
The investor response to Echo's move has been positive, however, and as an aside, also curiously pre-emptive.
Echo's shares were trading at $3.46 on Wednesday last week when the group lodged its proposal on the quiet with the government. That was not far above lows around $3.33 in February when Crown was unveiling its Barangaroo proposal, raising its stake in Echo from 5 per cent to 10 per cent, and attacking Echo for not joining its Barangaroo quest.
By Friday the shares were at $3.49 and on Monday they took off, rising to $3.61. They jumped again on Tuesday after the NSW government and Echo revealed the new proposal, closing 11¢ or 3 per cent higher at $3.72.
Curious timing aside, the share price surge reflects investor relief that Echo is not just sitting by while James Packer and Crown eat its lunch in the VIP gaming trade, which is a key target of an $870 million Star casino upgrade that was completed last year.
Crown's hotel and high-end gaming proposal for Barangaroo would still be the favourite, if only for the clout a Packer proposal has in Sydney. It is still backed by an exclusive agreement with Barangaroo's developer, Lend Lease, and proposes itself as an overlay to Echo's the Star casino and its broader market, rather than as a head-on competitor.
Echo is at least offering an alternative that could fend off the Crown challenge, and if its plan gets up, the odds on an Echo takeover battle would shorten. Crown and Echo's 5 per cent shareholder, Genting of Malaysia, have both sought permission to go up to about 25 per cent. Crown has consistently denied it will launch a full bid. Its options would narrow if Barangaroo fell by the wayside.
There would be no mass-market casino offer at Crown's Barangaroo development. It would aim only at high-rollers, in particular at the Asian whales who have transformed the VIP casino business.
Macau now accounts for about 80 per cent of that market globally. Singapore, a relatively recent entry, has 10 per cent with two casinos, about twice as much as Las Vegas.
Australia has about 3 per cent, split two-thirds Crown and one-third Echo, but Echo has been growing its VIP market share on the back of its $870 million upgrade in Sydney.
The economics of that expansion were put in place in 2007 when Echo agreed to pay the government $100 million to extend its exclusivity by 12 years. Echo at that time also received other concessions from the NSW government, including removal of betting limits on some of its pokies.
That's an example of the kind of horse trading that might occur again, but there could be nervousness on both share registers that the final composite price will be too high.
Echo already needs to boost earnings by about a third to hit its desired rate of return of 14.5 per cent on the big expansion and upgrade of the Star, and also has expansion plans in Queensland. Crown is larger, with a market value of $9.2 billion compared with Echo's $3.1 billion, but the Sydney project or a move for control of Echo would still be a major step.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Crown wants a $1 billion, six-star hotel and a high-roller-only casino facility at Barangaroo aimed at VIPs. Echo Entertainment (the Star) has lodged a fast‑track proposal to expand its broader integrated resort at Pyrmont. Crown’s plan assumes Echo will lose its Sydney exclusivity in 2019, while Echo’s plan is based on exclusivity being extended beyond 2019 — meaning only one proposal can realistically be chosen.
The fast-track process speeds up consideration of big projects and raised concerns it might favour Crown. Those concerns eased when Echo filed its own proposal, creating competitive tension. For investors that can mean higher licence fees, taxes or project concessions demanded by government — factors that can squeeze project economics and shareholder returns.
A NSW government advisory taskforce led by David Murray has been asked to make a recommendation by the end of next month. The government could technically reject both proposals, but the taskforce’s recommendation will be the key input for the decision.
Investors responded positively to Echo’s move. Echo shares traded around $3.46 when the proposal was lodged, rose to $3.49 by Friday, climbed to $3.61 on Monday and closed at $3.72 on Tuesday — an 11-cent (about 3%) jump after the NSW government and Echo revealed the new proposal.
If Echo’s plan succeeds it could shorten the odds of a takeover contest. Both Crown and Genting (Echo’s 5% shareholder) have sought permission to increase holdings to about 25%. Crown has increased its stake in Echo previously (from 5% to 10%) but has denied it will launch a full bid — however strategic moves around these Sydney assets could change those options.
Crown’s Barangaroo proposal targets high‑rollers (the Asian “whales”) and would not include a mass‑market casino. Echo has been growing its VIP share after an $870 million Star upgrade. Globally, Macau accounts for roughly 80% of the VIP market, Singapore about 10% (with two casinos, roughly twice Las Vegas’s share), and Australia about 3% — split approximately two‑thirds to Crown and one‑third to Echo.
In 2007 Echo agreed to pay $100 million to extend exclusivity by 12 years and received concessions such as removal of some betting limits on pokies. Similar bargaining could recur, but concessions (higher fees, taxes or project commitments) could raise the composite cost of winning the project and potentially reduce returns for shareholders.
Crown is materially larger with a market value of about $9.2 billion versus Echo’s roughly $3.1 billion. Crown also has an exclusive agreement with Barangaroo’s developer Lend Lease, giving it clout in Sydney. Echo’s strengths include its Star upgrades, VIP growth and a long casino licence (running until 2093), but Crown’s size and Barangaroo position make it the favourite for a high‑roller project.
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