Crown's value a bet on Macau fortunes

That is not necessarily a bad thing, just a sobering reminder for supporters of James Packer's gaming empire that Melbourne's Crown casino and Perth's Burswood are staunch contributors, but in an aged market.

Broker JPMorgan, after factoring in the soaring worth of Melco Crown, said last week the Macau gains warranted a lift in its price target for Crown stock from $9.80 to $10.25. That compares with Friday's $9.15 close.

While the independence of Morgan's analysis is unlikely to be impaired by the fact that it has provided investment banking services to both casino groups, it is a market maker in the Macau associate's stock.

Morgan also produced a strained argument for how a $3.3 billion Crown bid for the spun-out Tabcorp casino arm, Echo Entertainment, might work in shareholders' favour.

The speculation has been running since it emerged last month Crown had 4.9 per cent stakes, in derivative form, in Echo and Tabcorp. Crown has said it did that deal before the split and had "no current intention" of increasing its investment in either company.

Hopefully, Crown bought into Tabcorp at a low price, because the combined value of it and Echo is below their June 6 separation and most of that fall has come in Echo (although Tabcorp was assisted by renewal of its wagering licence in Victoria last week). Echo's shares have drifted down from $4.35 on debut to a close of $4.07.

That might make Echo an easier target, but whether it is sensible for Crown remains to be seen. The Morgan theory is that because Crown already has a stretched balance sheet there are only two real ways of funding a bid for Echo.

One is through a share-swap offer, which would dilute the Packer holding to about 33 per cent of the enlarged company.

The second is by selling its $2.6 billion stake in Melco Crown, which would clear close to the entire cash amount required to buy Echo.

Morgan thinks that for Crown investors that might mean a reward in share price terms because it believes the worth of the company's Melco Crown holding could be discounted by as much as 50 per cent because it is an arm's-length investment in City of Dreams and Altira casinos.

Theoretically, if the "passive" stake is cashed in and Crown gobbles up Echo, then its shares may fully reflect the worth of having direct involvement in all its casinos.

There may be some sentimental desire of Packer to buy the company that owns a Sydney casino given that his dad, Kerry, missed out on winning the original licence, almost got control of it in the late 1990s and then pulled out when it all got too hard.

Strategically, though, it makes little sense to swap the foothold in Macau for more in Australia unless Crown has a particularly grim view of where the world is heading and wants to cash up quickly.

Australians' propensity to gamble may be high, but this economy is not built around casinos. Macau's is and it is parked on the doorstep to the world's largest, most dynamic economy, China host to an ever-growing list of multimillionaires.

As such, the total Macau casino market is generating about $2.25 billion in revenue each month, of which Melco Crown is raking in about $300 million. In the June quarter of 2010, Melco Crown revenues were about $710 million. The same quarter of 2011 they were $1.01 billion, which means growth of 40 per cent. Since March 31 Crown's shares have gained 15 per cent. Melco Crown's stock, though, has gone from $US8 on Nasdaq at the end of March to a close of $US15.73 on Friday a 97 per cent gain. You would be a goose to kill that goose.

Southern Cross fight

BORIS Ganke, who was fighting battles for corporate control 30 years ago when even Insider was a fledgling, is clearly not going to hand over the reins of Southern Cross Exploration without a fight against Adelaide's Tim Lebbon.

Ganke has been on Southern Cross's board for all but six of its 41 years on the ASX and reckons it has been only the "various 'spoiling' and legal actions" by Lebbon over the past six years that have held back Southern Cross. "Shareholders, this is your company please protect it," pleads Ganke in his two-page letter to investors ahead of Wednesday week's vote to remove him and fellow board members.

By Insider's reckoning, Southern Cross would have to be one for the true believers. After all, more than 40 years as an exploration company and yet to pick a winning prospect to elevate company income above the turnover of a corner shop can only mean either extraordinary bad luck or poor choices.

Then again, that does not mean Lebbon's Noble Investments Superannuation is a godsend to investors either.

Copper Strike dilemma

DEFENDING executive chairman Tom Eadie at Copper Strike, who is trying to keep his board seat from Geoff Lord and others, told investors last week he intended handing them back 14? a share once the group sold its final project to largest shareholder Kagara.

The market reaction? The shares soared from 13? to 14.5?. That seems a little light on given that Copper Strike expects to still have $4 million, or about 3? a share, in cash after the capital return and that investors who have held the stock for at least three years are unlikely to face a tax bill.

insider@fairfaxmedia.com.au