James Packer’s decision to dump his shareholding in Echo Entertainment may have ignited a lot of speculation about his tactics in pursuit of his ambition of developing a new $1 billion high-roller facility in Sydney but it is actually very consistent with what he’s said all along.
From the moment Packer’s Crown Ltd emerged as a substantial shareholder in Echo last year he made it clear that his interest wasn’t in Echo itself but in building an arms-length exclusive new six-star hotel and gaming facility at Barangaroo.
The shareholding was one means to that end. Given that Echo has an exclusive casino licence until 2019 the initial strategy was to use the 10 per cent stake as leverage and as a threat to convince Echo to co-operate and 'lend' its licence to enable Crown to pursue the Packer vision.
Crown’s application to the New South Wales regulator to lift its shareholding to 25 per cent, approved only a week or so ago, was part of that strategy but it has been evident for some time that Packer wasn’t keen on the concept of actually bidding for Echo and acquiring its licence and The Star casino complex, about which he has been quite disparaging.
While the strategy was quite disruptive – Echo lost a chairman and chief executive as it struggled to respond – it wasn’t effective.
Packer’s plan B after Echo declined to co-operate was to lodge an 'unsolicited proposal' with the New South Wales government for the Barangaroo project which could circumvent Echo’s exclusivity. Echo, however, matched that with a proposal of its own, seeking an extension of its exclusivity and offering to invest more in The Star complex and surrounding areas to develop what it described as a "globally competitive integrated resort."
The competing proposals are mutually exclusive and will be decided on by an independent panel headed by former Commonwealth Bank chief executive officer David Murray next month.
If Packer prevails he would have no need for the Echo shareholding, which would inevitably be devalued by his win. If he loses the only way to pursue the Barangaroo concept would be with Echo’s co-operation.
There could be a plan B that doesn’t necessarily involve a bid for Echo, one given some credibility by the market’s response to Packer’s exit from the Echo share register. Echo shares slumped 12.5 per cent to $3 when the market opened, wiping more than $350 million from its market capitalisation.
To counter Packer’s proposal, Echo has committed to investing a large, if not publicly specified, amount of capital in The Star and its neighbourhood. It has just completed a near-$1 billion refurbishment of the complex and has yet to generate a decent return on that investment so the commitment to spend more will make investors wary.
It has also proposed spending another $1 billion to build a new casino and entertainment complex in Brisbane. The commitment to invest more in Sydney, coupled with the Brisbane project, raises the question of how a group with a market capitalisation of about $2.8 billion and $1 billion of existing debt might fund commitments of that magnitude.
The obvious assumption is that it would have to raise a big lump of equity at discounted prices. Echo raised $450 million of equity last year, so its shareholders may not be particularly enthusiastic about being asked for another contribution, particularly as Echo’s share price, which spiked when Packer and subsequently Malaysia’s Genting group appeared on its register, has deflated.
That could create an opportunity for Packer to return to the register on attractive terms but it might also enable him to re-submit his proposal for a co-operative approach to Barangaroo, helping to provide funding for Echo’s commitments in return for a partnership of sorts in a very exclusive high-roller facility – essentially a club for zillionaires – that would only compete at the margin with The Star.
It would, of course, be Packer’s preferred outcome to have his unsolicited proposal ticked off by David Murray’s panel rather than Echo’s and he might still abandon the Barangaroo concept if Echo’s counter-proposal prevails. Packer is, however, a good strategist and all is not necessarily lost if that were to occur.