Echo boss escalates Crown war
The contrasting share price performance of the country's two listed casino groups goes a long way to explaining the frustration the board of Echo must be feeling: Echo is trading at a record low while Crown is sailing close to a record high.
In dollar terms they are big numbers. Echo has lost $1.3 billion from its market capitalisation in the past year, while the value of James Packer's stake in Crown has risen $1.5 billion.
Echo's frustration became palpable on Thursday when chairman John O'Neill decided to throw a tantrum in the media and in the process divulge confidential discussions that allegedly took place between him and Crown chairman James Packer.
It wasn't a good look but it gives an insight into the pressure O'Neill must be feeling as the threat increases of Packer moving the casino battle to Brisbane, after a big victory in Sydney.
In a bid to try to stop the same thing from happening in Queensland, where the company has three casinos, O'Neill recounted a conversation he had with Packer, where he said Packer had some "choice words" to say about the Queensland government. "He had nothing much nice to say about the Newman government," O'Neill told The Australian Financial Review.
Whether that version of the conversation happened or not - and sources close to Packer vigorously deny they did - O'Neill was hoping to sully Packer's relationship with Queensland Premier Campbell Newman. A side effect is he has ratcheted up the war between both companies and made it personal.
With a share price wallowing at record lows and its monopoly position in Sydney and Brisbane under attack, it is desperate times for Echo, which O'Neill felt required desperate measures. If the past year's events are put into context, it looks like Echo has been outwitted every step of the way by Packer and his advisers. In the cold light of day, the board of Echo will be wondering whether its calculated risk not to engage with Packer when he approached them with a joint venture proposal was wise for investors.
What Echo investors are now trying to grapple with is its strategy. In Sydney Echo faces the spectre of competition from Packer. In Queensland, where its casinos are performing poorly, it faces a threat of Packer entering the market and a new casino being built on the Gold Coast as three of four companies have put in tenders to build a Broadwater passenger terminal with a casino.
Packer has made it clear he is interested in entering Brisbane and on Friday Rowen Craigie will fly to Queensland to inspect a potential site and meet with government officials.
Packer won over the O'Farrell government with his plans for Sydney and the concern is he will do the same with the Newman government. His argument will no doubt include a reminder of Echo's track record, specifically an in principle agreement it made with the government in December 2010 when it was Tabcorp (the company that Echo was spun out of).
That agreement included increasing its investment in three Queensland casinos from $175 million to $625 million in return for a number of gaming concessions, including 500 additional poker machines and transfer of 47 poker machine licences from the Townsville casino to Treasury or Jupiters on the Gold Coast, 50 additional table licences and a reduced tax threshold for interstate and international VIP customers.
As Packer pointed out in a letter that accompanied Crown's Sydney proposal: "More than two years later, only $40 million (or 6 per cent) of that promised investment has been made. Despite benefiting from some of the government's concessions between 2008 and 2012, the normalised EBIT (after significant items) from those properties has fallen by almost 40 per cent."
Expanding into Brisbane holds its attractions. Besides causing Echo a massive headache, the numbers stack up commercially.
There are a lot of ifs and buts, but if Packer decided to proceed with Brisbane and wins, it would mean Crown has busted Echo's monopoly in Sydney and Brisbane, while his business in Melbourne and Perth remains intact.
O'Neill went to ground on Thursday, but his board will be hoping his comments won't drive the share price down further.