Echo running out of cards against Packer's plan

John O'Neill came out with some fighting words at today's Echo Entertainment annual meeting. By now, however, he must realise that James Packer has adroitly manoeuvred Echo between a rock and a hard place.

Even as O'Neill, Echo's chairman, was saying that his board wasn't sitting on its hands waiting for competitors to progress plans for competing properties on Echo's turf but had a strategic growth agenda of its own, the NSW Government was announcing that Packer's Crown Ltd's plans for a competing high-roller facility within Sydney's Barangaroo project would progress to ''stage two'' of the government's ‘'unsolicited proposals'' regime.

That creates the prospect that Crown could grab a second licence in Sydney once Echo's exclusivity expires in late 2019. The government has said it will honour that exclusivity.

The government approval process could consume a year or more and the proposed ‘'six star'' hotel and entertainment complex, which would have to include the high-roller facility to be economic, will probably take years to build. The timelines almost work for Packer.

The appeal of that unsolicited proposals regime is that the NSW Government wouldn't have to conduct a tender for a second licence and with the NSW Opposition expressing its support for the Crown Sydney concept Packer is in a strong position to get his proposal up.

Even if there were a tender Packer did something very clever back in August.

The reason the politicians are so enthusiastic about his plan (apart from their dislike of Echo) is that there is an enormous desire in Sydney to make the massive Barangaroo development a success and revitalise Sydney.

Packer's vision of a $1 billion six star facility within the development, and one that uses Crown's experience with high-rollers and wealthy Asian tourists to bring them to Sydney, adds some real sizzle and political appeal to the development, particularly as Crown has said it is not seeking a licence to operate poker machines in the facility.

In August Crown shored up its back door against prospective competitors seeking to emulate its plan by signing an exclusive dealing arrangement with Barangaroo's developer, Lend Lease, to jointly develop the hotel resort within the southern precinct of the site.

While that arrangement is a two-year agreement, there are suggestions that Packer is close to striking a longterm arrangement that would secure his control of the site.

In any event, Packer has his foot on the one site for which there is a strong probability of government and, indeed, bi-partisan support for a second licence.

Crown also, of course, has a 10 per cent stake in Echo and has applied to the gambling regulators for permission to increase that stake.

Packer has always loved having options and the potential to move to a position of influence over Echo gives him at least the possibility of pursuing his Barangaroo vision under the cloak of Echo's existing licence for The Star casino and in effect joint venturing a combined Sydney high-roller business with Echo.

One assumes he'd prefer the go-it-alone option to sharing, but that would involve competing with Echo in the high-roller market.

Echo also has the giant Malaysian-controlled Genting group on its register, which might have its own ambitions. If it backed Echo, the competition for the high-roller market could become costly for everyone involved, particularly if Echo pursued a new dedicated VIP gaming facility of its own elsewhere in Sydney, as O'Neill appeared to be hinting.

In a head-to-head contest between Echo, relatively new to the high-roller market (which has resulted in some significant teething problems) and Crown, with considerable experience and success in that market, two existing Australian facilities and a major interest in a number of Macau properties, Packer has the greater firepower and the nature of the proposed Barangaroo facility would add to it.

Echo hasn't been helped in responding to Packer by its own internal scandals, the boardroom tensions that saw former chairman John Story ousted and more recently respected director Brett Paton resign -- and the looming loss of its chief executive, Larry Mullin – but it does have plenty of time to get its act together and formulate an approach to dealing with the prospective Crown invasion.

Co-operate or compete? Ultimately that may be Packer's call rather than Echo's.

If there is to be co-operation, it is likely to be on terms tilted towards Crown given that he has the go-it-alone option to use as leverage while Echo's counter is that it can offer certainty (which the Government's response to Crown's proposal has devalued), a slightly earlier opening of the facility and an avoidance of the value-destructive impact of competition on both parties.

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