Packer wins $1.3b wager against Echo
The NSW government's decision on Thursday to wave through his proposed $1.3 billion luxury casino and hotel facility at Sydney's Barangaroo to the next stage of the protracted approval process all but guarantees Mr Packer's Crown casino shimmering logo will soon be a fixture on the Sydney skyline.
It is expected that shares in Echo Entertainment Group, owner of Sydney's only casino at Star City, could fall by as much a 5 per cent when the market opens on Friday as investors adjust their valuations to reflect the likely end of its monopoly licence in 2020 and a new competing casino on the other side of the harbour under Mr Packer's ownership.
Crown and Echo shares were placed in a trading halt on Thursday just after midday as both companies braced to hear the deliberations of the independent steering committee chaired by former CBA boss and ex-Future Fund chairman David Murray that advised the NSW government on the competing casino proposals.
But before the trading halt was imposed investors had already voted with their wallets, sending shares in Mr Packer's Crown up 26¢, or 2.2 per cent, to $12.21 while Echo stock was sold down 13¢, or 4.3 per cent, to $2.91.
The NSW government's invitation to Crown to move to stage three of the unsolicited proposal, and hence the knock back to Echo's proposed billion dollar redevelopment of its site, means Mr Packer is close to his dream of having a truly national Crown casino franchise.
If ultimately successful, Crown Sydney at the Barangaroo would link arms with the billionaire's flagship Crown casino in Melbourne, Crown Perth as well as hook into an international network through Crown's investments in Macau and London casinos.
But analysts were quick to remind investors that Mr Packer's victory did not guarantee a rally in Crown's shares when trading resumes, and that likewise Echo shares shouldn't collapse.
Credit Suisse analyst Larry Gandler said he had a valuation of $2.60 to $2.90 on Echo shares if Mr Packer's casino and development at Barangaroo went ahead.
Mr Gandler said before the announcement and trading halt in Echo shares on Thursday, the market seemed to be reflecting in its share price a 50 per cent reduction in VIP turnover in 2020 and a 20 per cent reduction in private gaming room revenue after the new Crown in Sydney opened.
"It's broadly neutral for Crown," Mr Gandler added, "but it also opens up strategic options for growing their overall VIP gambling business but they are spending $1.5 billion to do it."
Goldman Sachs analyst Adam Alexander said it was still too early to forecast the exact impact on the companies' valuations.
He said he believed Crown's stated target of a 15 per cent return from its billion-dollar plus development of a new luxury casino and hotel could be difficult to achieve, especially as it was likely the new casino would be limited in the types of gambling it could offer.
"For Echo it's in 2020, how much of their play do they lose to Crown. There will be some impact but it's a long-dated impact on their DCF and whether they invest now in redeveloping their own casino or not will change that value," he said.
Echo had proposed to invest as much as $1.1 billion to redevelop its Darling Harbour precinct.
Frequently Asked Questions about this Article…
The NSW government invited Crown to move to stage three of its unsolicited proposal, effectively clearing the way for Mr Packer’s proposed $1.3 billion luxury casino and hotel at Barangaroo to progress in the approval process. If ultimately approved, the project would create Crown Sydney and link it with Crown’s existing casinos in Melbourne and Perth as well as its international investments.
Both companies were placed in a trading halt just after midday as the market awaited the steering committee’s advice. Before the halt, Crown shares rose 26 cents (about 2.2%) to $12.21, while Echo shares fell 13 cents (about 4.3%) to $2.91. Analysts warned Echo shares could fall further—around 5% was suggested—when trading resumed as investors updated valuations.
The decision increases the likelihood that Echo’s effective monopoly in Sydney will end by 2020, since a new Crown casino at Barangaroo would create direct competition across the harbour from Echo’s Star City. That prospect is already being priced into Echo’s share valuation by some investors and analysts.
Credit Suisse analyst Larry Gandler said he values Echo shares at about $2.60 to $2.90 if Crown’s Barangaroo development goes ahead. He noted the market appeared to be pricing in a roughly 50% reduction in VIP turnover and a 20% fall in private gaming room revenue in 2020 as potential impacts of the new competition.
Not necessarily. Analysts cautioned that the invitation to progress to stage three does not guarantee a share-price rally. Credit Suisse described the outcome as “broadly neutral” for Crown, while Goldman Sachs’ Adam Alexander said it’s too early to forecast exact valuation impacts. Crown is spending heavily—analysts referenced about $1.5 billion of investment—and achieving its target returns could be challenging.
Crown’s Barangaroo proposal is described as a $1.3 billion luxury casino and hotel development. The article also notes Crown is spending around $1.5 billion on related growth initiatives. Echo had proposed up to $1.1 billion to redevelop its Darling Harbour precinct, a plan that was effectively set back by the NSW government’s invitation to Crown to progress.
Analysts warned the new casino could be limited in the types of gambling it can offer, which might make Crown’s target returns—cited as about 15% on the development—difficult to achieve. Competition for VIP gamblers and the long-dated nature of those revenue impacts were also flagged as risks for both Crown and Echo.
Watch for formal updates from Crown and Echo when trading resumes, read analyst revisions to valuations (some already provided ranges for Echo), monitor regulatory progress through the approval stages, and consider the long-term competitive impact on Echo’s Star City revenues. Analysts urged caution—it’s still early to forecast exact effects, so factor uncertainty into any investment decision.
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