Echo plays its hand well

With the Packer-Story stoush out of the way, a capital raising, and Genting on the scene, Echo hasn't jumped all its hurdles but it's doing quite well given the circumstances.

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In the circumstances, and with a little help from James Packer and Singapore’s Genting, Echo Entertainment is playing the hand it was dealt quite well.

A week ago Echo, operator of The Star casino as well as casinos in Queensland, was being besieged and destabilised by Packer who was planning an extraordinary meeting of shareholders to try to displace Echo’s chairman, John Story, with former Victorian premier Jeff Kennett as part of a game plan to gain influence over Crown Ltd’s major domestic rival.

The campaign was intensely personal, directed aggressively against Story and his stewardship of Echo. On Friday Echo pulled the rug from under that campaign when Story resigned. Today Crown formally withdrew its requisitioning of the meeting.

Echo also, moreover, placed itself in a trading halt ahead of a capital raising, speculated to be anywhere between $250 million and $450 million, that would have been difficult to announce had it still been in the midst of a boardroom stoush. The speed at which Echo has moved suggests a mixture of opportunism and necessity.

The opportunism relates to a share price that has been inflated by Packer’s interest and the surprise emergence of Genting, a sprawling conglomerate with its roots in Malaysia that is also one of the world’s largest and most diversified casino operators, with a shareholding of just under five per cent of Echo.

The necessity relates to the $78 million or so of ‘’significant items’’ Echo has foreshadowed within its full-year results – including nearly $30 million related to the collapse of one of Echo’s VIP gambler marketing partners – and the unfortunate run of poor luck The Star has experienced with its international high-roller gaming business, where its ‘’win’’ rate has been well below the theoretical rate for much of the year.

Echo is relatively new to that high-roller business (the relationship with the collapsed SilkStar business and its customers was an attempt to fast-track is growth) and it appears it underestimated the volatility and the potential for sustained below-theoretical outcomes from that business.

While the law of large numbers will eventually prevail, with Packer on the prowl and its regulator also paying very close attention to it after the recent independent inquiry into the sacking of its former casino manager, it would be reckless to allow the business to be under-capitalised within a difficult external environment.

While Packer’s campaign against Story was afoot, a capital raising would have been difficult and would have provided more ammunition for the campaign. With Story out of the picture and the Packer campaign (temporarily?) aborted the opportunity to shore up Echo’s balance sheet opened up and Echo has grabbed it. Both Packer and Genting could be expected to take up their share of the raising.

The entry of Genting to the scene has added some spice to the situation and complicated any strategy Packer may have had of obtaining influence over Echo – and the shelter of its licence to pursue his vision of a new luxurious dedicated high-roller facility at Barangaroo in Sydney.

It is possible, as is being speculated, that Genting and Packer might co-operate on a plan to gain control of Echo. Genting’s Singapore-based entity which appears to have been buying Echo’s shares, however, is a business with a $14 billion market capitalisation (Crown’s is about $6 billion) and plenty of firepower to pursue its ambitions independently. It has had a long involvement in the Australian casino industry but also owns and operates one of the two new giant casino and entertainment complexes in Singapore.

Packer is concerned about the impact of those new complexes on his businesses in Australia and Macao and his interest in Echo appears to be motivated by a desire to be able to market the Australian industry, and Sydney in particular, as a rival destination to Asian high-rollers.

Genting, which has no presence in Macao, which is booming, might see Echo as a similar piece of a regional network of gambling destinations (it also has casinos in Malaysia, the UK and the US) that it can offer VIP gamblers.

For both of Packer and Genting, with Echo entering the final phase of a near-$1 billion upgrade/rebuilding of The Star, there is an obvious appeal in having some kind of relationship with the operator of what is virtually a new complex on Sydney’s famous harbour.

With the personal hostilities and emotional issues shelved with Story’s departure, any new discussions between Echo and the two casino operators on its register are likely to be pragmatic and purely shareholder value-based. It may also be able to develop a better relationship with the NSW Government, which has been openly supportive of Packer’s Barangaroo concept.

For Echo, while having two strategic shareholders on its register might represent a threat to its independence, particularly if they join forces, it also creates an opportunity to generate some competitive tensions and options and ensure that control/influence isn’t conferred without an adequate control premium.

It will be aided by the public stance taken by its other major shareholder, Perpetual, last week. Perpetual, which has stakes of about eight per cent in both in Echo and Crown is supportive of the idea of combining them but was opposed on governance grounds to Echo allowing board representation to a competitor owning only 10 per cent.

A week ago Echo was in an awkward place and under mounting pressure. Having removed the focus of Packer’s attacks, seen Genting arrive on its register and launched into a capital raising Echo might not be out of the woods yet, and will carry some scars from the stoush with Packer and its own operational issues, but it is in a stronger position today than it was then.