It's all about Echo-nomics
Regardless of whether competition in the casino market will financially benefit the two rival players, Crown and Echo, the NSW government has extracted a guarantee that James Packer's outfit will deliver an additional $1 billion in gaming tax payments.
Premier Barry O'Farrell can bank this revenue regardless of whether Packer can make a great return.
And this is before accounting for any tourism benefits that will come from building a new casino and six-star hotel.
While Packer will undoubtedly be elated that his proposal to make his mark on the Sydney gaming industry has been accepted, on the other side of Sydney Harbour the folk from Echo will be licking their wounds. The full reality will be sinking in that the $870 million sunk into Star Casino will have only six more years to produce mega returns, before competition starts to eat into its monopoly.
The government's assessment of the two proposals came down to the simple economics.
The increase in gross state product (GSP) from choosing Crown would amount to $442 million in 2025 compared with $350 million from the growth of Echo's proposal. The net present value of additional tax from Echo bolstering its operations by 2035 would be $337 million, versus $441 million for Crown. Behind the rationale of the committee advising the NSW government was that competition was a net positive, and pitting two casinos against each other would improve their combined growth.
The committee of experts, headed by former Future Fund chief David Murray, made much of the fact that Crown is a better operator than Echo and its growth rate in Melbourne is superior. It now beggars belief that Echo will pour $1.1 billion in fresh capital into the Star in a competitive market as promised.
It was a stretch for Echo to get payback on this investment in an uncontested market. It will still have to maintain and improve the Star property, but investors will not sanction hefty capital expenditure.
Echo reckons that over most of the past 10 years, given that it had been part of the Tabcorp group, it did not have the capacity to invest heavily in its Sydney casino.
But it must be said that since Echo's demerger from Tabcorp it has made an $870 million revamp of its project, but has not yet managed to extract the projected returns.
Under Echo's new - and more experienced - management, it has a better focus on milking its assets more astutely.
While Packer has been a winner on the day, the real test is now ahead of him. His Melbourne operation has been very well run, but it is still a monopoly. He has spent money upgrading and enhancing Crown, but in Sydney it will be starting from scratch.
His capital expenditure plans have to make a return, which according to analysts has been projected to be about 15 per cent.
There are question marks around how stretched these targets could become. In its proposal to the NSW Government, Crown reminded Murray that it had a better record.
Crown Sydney will be able to almost treble the volume of VIP business coming from Asia, and can leverage its joint venture in Macau. But the clincher for Crown was its contention that the average NSW punter would not be able to use its VIP casino.
If you are a Crown investor you would be hoping that there is a fuzziness around what constitutes a VIP invitation-only patron. If only real VIP restrictions were imposed, Crown's ability to get a return would be a tough ask.
The Holy Grail for Crown and Echo is to grab a larger slice of the middle-class Chinese family market that so far at least has not been visiting Australia in droves.
In this respect, both Crown and Echo need to do battle with their casino competitors in Singapore and the Philippines, as well as with each other.
Frequently Asked Questions about this Article…
The NSW government chose Crown (James Packer's group) over Echo for the new Sydney casino project. The government also secured a guarantee that Crown will deliver an additional $1 billion in gaming tax payments.
Echo faces increased competition that will eat into the monopoly returns the Star Casino has enjoyed. The article notes Echo has already spent about $870 million on revamping the Star and will have roughly six more years before competition intensifies, making it harder to recoup that investment.
The committee, led by former Future Fund chief David Murray, based its recommendation on economic metrics: Crown’s proposal showed a larger boost to gross state product (about $442 million in 2025 versus $350 million for Echo) and a higher net present value of additional tax ($441 million for Crown versus $337 million for Echo). The committee also judged Crown to be the stronger operator with better growth in Melbourne.
Crown plans a new casino and six‑star hotel and expects to grow VIP business—potentially almost trebling VIP volume from Asia by leveraging its Macau joint venture. Analysts cited in the article project capital expenditure returns around 15%, but the piece warns these targets could be stretched and the real test is delivering those returns in a competitive market.
The $1 billion guarantee gives the NSW government a secured revenue boost regardless of Crown’s profitability, which is a clear fiscal win. For investors, it reduces fiscal uncertainty but doesn’t eliminate operational risks tied to Crown’s ability to achieve projected customer volumes and returns.
Key risks include stronger competition eroding Echo’s monopoly returns, the possibility that Echo won’t or can’t follow through with large fresh capital injections (the article questions the likelihood of Echo pouring $1.1 billion into the Star), Crown’s ability to meet ambitious VIP and capex return targets, and broader competition from casinos in Singapore and the Philippines.
VIP business from Asia is central to Crown’s strategy—Crown argues it can dramatically expand VIP volumes using its Macau ties. However, the government’s requirement that VIP areas be invitation‑only and the definition of a ‘VIP’ patron could limit how much of that business Crown can actually access, affecting projected returns.
The article urges caution: Echo’s pledge of $1.1 billion fresh capital into the Star looks doubtful in a competitive market, and investors may be reluctant to sanction hefty capex. For Crown, planned upgrades must deliver the projected returns (analysts estimate about 15%)—so investors should focus on execution, realistic demand assumptions, and how competition will impact payback timelines.
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