Echo's new challenge - cosying up to Genting

Echo investors should thank their lucky Star the NSW government has given the gong to Crown for a second Sydney casino licence.

While the loss of a monopoly licence will detract from earnings – particularly the lucrative high-roller income – it will not be for many years to come. And the alternative could have been much worse.

Echo’s knee jerk reaction to Crown’s assault, a plan involving yet another $1 billion upgrade to The Star, could have backfired spectacularly.  Echo is still putting the finishing touches to its most recent $1 billion upgrade, an investment that so far has done little to generate a decent return (see Cliona O'Dowd's Collected Wisdom).

Instead, Echo should turn its attention to cementing a relationship with its major shareholder, Malaysian casino group Genting, which has a stake in excess of 6%.

Genting entered the fray shortly after Crown snapped a 10% stake in Echo last year – an investment that since has been sold – igniting speculation about a possible Echo carve up. Instead, its presence on the Echo share register stymied Crown’s ambitions to take control of the Sydney based casino operator.

While it has been largely overlooked, Genting has a long history in Australian casinos.

In partnership with Perth entrepreneur Dallas Dempster, it developed and then operated Perth’s Burswood Island casino which, ironically, now is part of the Crown empire.

The Malaysian group also was an early investor in the Queensland based Jupiters Casino group, now a major part of the Echo portfolio. So it understands the Australian market and has intimate knowledge of a large part of Echo’s business.

Of even more significance, Genting locked horns with Crown in 2006 over the development of Singapore’s massive Sentosa Island casino development. Genting won that contest in a $4 billion duel that dealt a sharp blow to Crown’s Asian expansion plans.

Rather than be caught in a casino no man’s land between the Melbourne-based Crown and Genting’s Malaysian and Singapore operations, Echo chairman John O’Neill should now look to capitalising on opportunities that may arise from a working relationship with Genting.

Crown shares rallied again this morning, rising sharply on news of the Sydney win. But Echo will maintain its monopoly until 2019 so there is no risk to Echo’s earnings for at least seven years.

And it now can concentrate on a more considered investment proposal and work on a way to lure Asian high rollers in conjunction with a strategic and powerful partner.