Odds favour Crown in fight for winning hand in Sydney
Echo Entertainment's new boss John Redmond must walk a very fine line in his pitch to the NSW government between offering enough to secure an extension of the company's exclusive NSW casino licence and overpaying, which would jeopardise the returns for Echo's shareholders.
James Packer's Crown Casino, which has submitted a competing proposal to build a new upmarket hotel and casino at Barangaroo, is in a strategic pole position because it has two options with which to work. It either wins a second licence in NSW or it loses and moves to take control of Echo and piggyback its casino.
Echo shareholders are generally supportive of Redmond's move to furnish a proposal to the government to protect exclusivity beyond 2019, but they won't do so at any price. It has to be a shareholder-accretive deal that stands up on its own merits - regardless of the competitive threat.
The NSW gaming regulator last week gave Packer the green light to increase Crown's holding in Echo to 23 per cent. It is a comfortable fallback position in the event that Packer is unsuccessful in his quest for approval to build a second casino at Barangaroo.
Given Echo has casino operations in Queensland, Packer still needs approvals from the Queensland gaming regulator before being able to move to 23 per cent of Echo, but this is considered to be only weeks if not days away.
This battle royale between Echo and Crown for the NSW casino market has now reached the pointy end of proceedings.
But neither party has yet shown its full pack of cards.
It runs deeper than just either party investing in building new facilities.
Echo has made non-specific noises about developing tourist-related infrastructure around its existing site at Pyrmont, which is across the bay from Sydney's CBD.
Crown has promised a six-star hotel as well as gaming facilities.
Both will be looking for some kind of concessions - probably tax breaks - in order that an investment of $1 billion or more can produce a return.
There has been talk around the industry recently that Crown has been considering charging casino patrons a fee for entry which could then be passed back to the government.
At this stage, there is no suggestion that Crown would make an up-front payment for the licence, but the negotiating positions appear to the fluid.
There is an expectation that Echo's bid to extend exclusivity will involve some kind of fee. The last time it negotiated an exclusive deal (for 12 years) it paid $100 million.
Packer has time on his side. By the end of June, the NSW government will have made its decision. Until then there is no plausible reason for Packer to make a decision about the investment in Echo.
If Crown wins - and the odds are on its side - it will seal the deal to build Barangaroo and compete with Echo after 2019.
If Echo wins, Packer has the option of increasing his stake to 23 per cent and gaining de facto control of Echo on the cheap.
Echo's share price has been steadily declining over the past six months, while Crown's has been on the ascendancy. This makes for an interesting game. If Packer loses his bid to build Barangaroo, then there will be an expectation that Crown will buy more of Echo's shares.
If Packer wins the right to build Barangaroo, Crown's share price might come under some pressure because of the capital expenditure demands it places on the company.
But Echo's share price would also come under pressure because it will have a competitor in the NSW market.
The bottom line is that introducing competition into a market always means a sharing of the profit spoils.
For governments, granting or extending casino licences is not a simple case of who is the highest bidder.
NSW's O'Farrell government needs to look at what will net the state the biggest annuity stream - either in taxes or tourism, and deduct any of the social costs of increased gambling.
The New Zealand government this week allowed its local casino company SkyCity to expand its operation in Auckland. It will come at a cost of $NZ402 million ($332 million) for SkyCity and inject an estimated $NZ90 million into the economy along with 1000 new jobs.
The New Zealanders get a major new convention centre and the opportunity to impose some restrictions on those gaming.
But it was a simpler decision for the New Zealand government because it was not a competitive tender.