There’s a lot of confusion over the technicalities of James Packer’s disclosure that he has an interest in Echo Entertainment but little about his intent. It was obvious from the moment Echo was de-merged from Tabcorp last year that Packer’s Crown Ltd would eventually, and probably quickly, move on Echo.
The confusion, indeed controversy, relates to the nature of Crown’s interest in Echo, which is held through a cash-settled equity derivative which, presumably, is about to be settled.
There has been some angst about Crown’s failure to lodge a substantial shareholding notice despite claiming a 10 per cent interest in Echo. Provided Crown and Deutsche have been careful, however, a swap doesn’t create a relevant interest unless and until it is settled and therefore Crown isn’t required to lodge a notice until it actually owns the shares that presumably hedge the other side of the derivative contract.
Indeed the Takeover Panel’s guidance on swaps is that a substantial shareholding notice wouldn’t normally be required unless the taker of the swap – Crown – was otherwise required to because of a physical shareholding. The panel suggests a written note to the company concerned, which is what Crown lodged with Echo last week.
The whole issue of disclosure of interests held via derivatives has been a vexed one ever since Glencore successfully appealed a 2005 Takeovers Panel declaration of unacceptable circumstances in relation to equity swaps it held that gave it an economic exposure to shares in Austral Coal. It remains an area where legislative reform could be considered.
In the Crown v Echo story, however, it is a diversion. The more interesting plot line is Packer’s attempt to get the current 10 per cent shareholding limit in Echo lifted by offering grand developments – big investments and prospective tourist drawcards – to the NSW and Queensland governments and, if he is successful, how he plans to go about convincing Echo to be the captive vehicle for his grand plan.
Unless he can get the shareholding cap lifted there would be no ability to bring Crown’s casinos in Melbourne and Perth next to Echo’s Sydney casino and create a monopoly network of domestic casinos to capture the growth in Asian tourists and gamblers.
The inducement being dangled in NSW is huge – a new $1 billion casino and entertainment complex within the new Barangaroo development on the western edge of Sydney’s CBD. With Echo holding an exclusive casino licence in Sydney, he needs the umbrella of that licence to build the new casino. He’s also promising upgrades of Echo’s Queensland casinos.
The disclosure of the interest in Echo made it possible for Packer to go public with his plans for the Barangaroo development and start lobbying for it – and for the lifting of the ceiling on Echo shareholdings. He has also insinuated that Crown wouldn’t bid for Echo but emulate his good friend Kerry Stokes’ tried and trusted strategy of creeping his way to control.
Given that Echo has a market capitalisation of $2.95 billion, and an enterprise value of $4 billion, a cash bid by Crown, with a market capitalisation of $6.2 billion would almost certainly be too difficult to fund and any level of scrip would inevitably be significantly dilutive for Crown shareholders – and would either dilute Packer’s own shareholding in Crown or force him to pump in a lot more cash to maintain control.
That’s what makes the ’creep’ strategy fairly compelling for Packer, if not Echo and its shareholders.
Echo has already rejected, quite properly, a request for board representation from its major domestic competitor. One assumes that, even before it was de-merged from Tabcorp and distanced from its gaming and wagering licences, the Echo board-in-waiting was drawing up plans for the inevitable assault from Packer – who had bought into Tabcorp just ahead of the split.
With its own $1 billion upgrade of its Sydney casino nearing completion, on time and on budget, and the early results of the massive renovation/rebuild very promising, Echo would presumably want an opportunity to demonstrate the value of the rebirthed complex, and its own value, before Packer gets a stronger foothold on the register.
From Packer’s perspective, the inherent risks of such a major project have reduced as more of the complex has been completed and it makes sense to move now before any structural change in Echo’s financial profile becomes evident to the market.
The Barangaroo project is a clever way of dangling a carrot before the NSW government and gaming authorities to clear the pathway to an influential presence on the Echo register.
If he gets what it wants – and he’s already elicited an encouraging response to the offer of a $1 billion investment and a lot of jobs and activity – the next challenge, in the absence of a full takeover bid, would be to convince the Echo board that it is in their shareholders’ interests for their company, with Crown’s support, to build that second casino and hotel complex.
That’s the sort of discussion his friend Stokes is famous for, but usually after he’s crept his way to effective control. Even if he can get the shareholding limit lifted, it will be interesting to see whether Packer can be as convincing and is able to persuade the Echo board that it is in their company’s interests to be the vehicle for his latest casino ambitions.