Concern that the NSW government's "unsolicited proposal" fast-track process for big projects amounts to a red carpet way for James Packer's Crown casino group to gazump Echo Entertainment's Star casino in Sydney are eased somewhat by news that Echo has made its own fast-track proposal.
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 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 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 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.