It's all about Echo-nomics
And the winner of the battle for the Sydney casino market is (drum roll please) ... the NSW government.
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.