Crown king James sends Echo packing
James Packer has outmanoeuvred, indeed snookered, Echo Entertainment and is on the brink of achieving his ambition of adding a VIP gaming facility in NSW to the Crown portfolio of gaming facilities.
The endorsement of Crown’s proposed $1 billion-plus six-star hotel and 120-table VIP gaming complex at Barangaroo in Sydney by an independent panel headed by former Commonwealth Bank chief executive David Murray and by the NSW government doesn’t guarantee the construction of the facility but has knocked out the counter-proposal Echo belatedly put forward to try to protect its NSW casino monopoly.
Crown will now proceed to stage three of the NSW government’s unsolicited proposals process for major projects, with the government saying that it retained the right to not proceed if a satisfactory binding agreement couldn’t be achieved. The Barangaroo complex will also have to go through the NSW planning approvals process.
Having got this close to success in an 18-month or so campaign to enter the NSW market, however, it is unlikely Packer will let the opportunity slip from his grasp.
Crown’s 'winning' proposal involves an upfront payment to the government of $100 million, a tax rate on gaming revenue of 29 per cent and a guarantee that the government will receive at least $1 billion from the combination of the upfront fee and the gaming taxes over the next 15 years.
Echo's competing proposal was a $1.1 billion expansion of its existing casino complex, including two new hotels and investment in public infrastructure as well as a $250 million upfront payment. But Crown included an option that matched the $250 million payment -- but at a lower tax rate (27.5 per cent) than the 29 per cent at which the panel and government settled. That is the same rate faced by Echo on its VIP gaming revenues.
The model recommended by the government is one that favours competition over a monopoly.
Echo had sought to extend its exclusive casino licence from 2019 to 2034. Alternatively it was prepared to cede its exclusivity if Crown were limited to international and interstate VIP gamblers. Instead, from 2019, it will face competition from Crown for high rollers – including domestic VIP gamblers.
The panel’s logic in opting for competition with a levelled playing field in terms of the tax rate is that the government doesn’t risk any gaming tax revenue if (or rather 'when') Crown cannibalises Echo’s high-roller business but could benefit significantly as both groups compete to lift their share of an Asian VIP gambling market estimated to be worth $34 billion a year. Australia has about 1 per cent of that market.
It wouldn’t have hurt Crown’s pitch that its record in attracting Asian high rollers to its Melbourne complex is far superior to Echo’s, despite The Star casino being located in Sydney, a more naturally compelling destination for high-net-worth tourists. David Murray said Echo had under-performed in the VIP market.
As damaging to Echo, indeed more damaging, was the panel’s assessment that the net present value of Crown’s taxes and licence fees – $442 million – was substantially larger than the contribution it was estimated Echo’s proposal would make to the state economy. The panel didn’t take into account the wider impact of increased tourism on the NSW economy if Crown (or Echo, had it succeeded) were to attract more high rollers.
Packer began pursuing his quest for a Sydney presence not that long after Echo’s 2011 demerger from Tabcorp, starting to acquire a shareholding in the rival operator late that year as part of the original strategy of convincing/coercing Echo into cooperating and lending its exclusivity to enable him to create a Crown presence in the city.
That was disruptive at a board and management level for Echo – it lost a chairman and a chief executive in the process – but it didn’t fold. Packer then changed course, pursuing the 'unsolicited proposals' route and, in May, dumping his Echo shareholding.
While Echo tried to counter that proposal it was always going to be difficult for it to make a competitive alternative work, not just for the government but for its own shareholders. It’s already spent close to $1 billion upgrading The Star and spending another $1.35 billion largely to protect and extend its exclusivity wasn’t going to do much for its lacklustre returns.
Assuming Crown gets through the third stage of the process and obtains the requisite planning approvals Packer will add an upmarket Sydney presence to his existing Melbourne, Perth and Macau complexes. He has also expressed interest in Queensland, where Echo operates the two existing casinos.
That may have been a diversion but Echo, having seen how adroitly Packer can play the strategic and tactical games, will be conscious that it could eventually have to compete with him in both its other monopoly markets. That would be an uncomfortable thought.