Packer wins $1.5b wager against Echo
Investors have been taught a salutary lesson that when it comes to casinos, never bet against James Packer.
The NSW government's decision on Thursday to wave through his proposed $1.5 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.