Echo on rebound
As tactically clever as Echo's plans are to expand its Star casino into a classic integrated mega-resort, it is still a defensive play against James Packer's aggressive interloper, Crown.
Packer hasn't yet been outfoxed - and he may still get the prize of a Sydney casino licence - but Echo has played all its cards towards winning the favour of the NSW government, which itself only has two agendas, tax and tourism.
Echo played an interesting move in giving the NSW government two options. The first is to continue its exclusive arrangement and pay $250 million for the next 15 years with a $1.1 billion development.
The second is to develop the Star on a non-exclusive basis with Crown's Barangaroo (but clip the wings of Crown Sydney by limiting the types of punters allowed in). That for Packer is not really financially viable and it is hard to see him swallowing it.
Echo is full of expert analytics that compare the benefits to NSW of Star over Crown Sydney and, even if you dilute these to take into account the fact that Echo commissioned the report, you still come away with the conclusion that this $1.1 billion Echo project will generate a better outcome in terms of tax take and tourism.
But is the best outcome for the public coffers necessarily the best outcome for Echo shareholders?
It was fascinating to listen to the Packer supporters focusing their arguments on the strain on Echo's balance sheet while team Echo were looking out for the health of the NSW economy.
Packer would have us believe the risk for Echo shareholders is how it would pay for this $1.1 billion gaming/entertainment complex.
Echo boss John Redmond doesn't think it's a problem. He says it will be financed through debt, cash flow, underwriting the dividend re-investment scheme and good timing. Redmond didn't mention project finance, but it could present another source.
There are more than six years of Echo's exclusive licence left and little capital expenditure needed on its existing facilities.
Packer supporters say it simply can't be done without an equity issue or asset sales.
Investors should be focused on whether Echo can make a return on the $1.1 billion plans to spend on hotel rooms, parklands, bridges, art and water slides. These features bring the tourists in but the gaming is the part that makes the returns.
Only $77 million of the capital will go towards gaming. (Echo has an existing deal that includes unlimited gaming tables.)
Meanwhile, investors are still waiting for the promised 14 per cent returns on Echo's recent $870 million overhaul of Star to start hitting the mark.
Sure, Echo has pinched a bit of market share and this should continue to gain momentum, but the investment hasn't yet reached expectations.
Echo can also justly claim that most of the board has changed since the first Star revamp. But the investment is large and will require a big lift in operational performance.
Perhaps the riskier of the two Echo plans is if it goes ahead with the $1.1 billion construction project but the scaled-back Crown operates across the water at Barangaroo. Under this proposal (lets call it Echo mark II), Star will lose some of its punters, but only in the rebate business, which is primarily interstate and international.
The net present value of this business according to Echo is $250 million, which is what it is offering the NSW government for exclusivity. This is not the main prize. Packer wants (and needs) the non-rebate business and Echo mark II is conditional on allowing none of this at Sydney Crown.
Meanwhile Crown will be moving through the same process of assessing returns in the event it gets the right to build Barangaroo.
It is no surprise that Crown's Sydney building has morphed into more casino and apartment and less 6 star hotel over the past six months. Crown Sydney needs the earnings from gaming to support the Barangaroo venture.
Echo's ultimatum to the NSW government that it will still build its development if Barangaroo gets the green light is a way of mitigating Crown's competitive threat. The numbers on a scaled-down casino in Barangaroo will not stack up for Packer. The much smaller rebate market certainly wouldn't need the 100 to 200 tables that Crown Sydney is said to have in its blueprints.
By way of comparison, in Las Vegas MGM Grand has 145 tables, The Venetian 110, Wynn Encore 240, and The Mirage 93.