THE DISTILLERY: Casino cash-in

Jotters list the reasons James Packer trumped Echo, but one notes the state government was always the true winner.

Crown billionaire James Packer plays one hell of a game. The word “outmanoeuvred” appears frequently in this morning’s business pages as the nation’s finance columnists dissect why the son of Kerry triumphed over Echo Entertainment for the next Sydney casino licence, and what that means for the defeated party and the state government.

Also in this morning’s bumper edition of The Distillery, two columnists are looking at the fiscal expansion overtones from reinstalled Prime Minister Kevin Rudd and the possibility that Opposition Leader Tony Abbott may be lured into a spending war for votes.

But first, The Australian Financial Review’s Chanticleer columnist Tony Boyd writes that Crown might be a listed company, but Packer’s planning shares all the hallmarks of his late father Kerry when he made a run at Australian cricket.

“He sold out of free-to-air TV at just the right time in the cycle. His later decision to sell 25 per cent of Foxtel and half of Fox Sports to Rupert Murdoch was just as smart. In choosing to build his wealth in gaming, Packer chose one of the toughest and most competitive businesses in the world. But he did so at the right time in the cycle. As he built the Crown business in Australia and Asia, the financial power and influence in gaming shifted from Las Vegas in the United States to Asia. Macau is now the largest gaming centre in the world, although it constantly battles a reputation for being the hub of money laundering for China. It is possible a crackdown on money laundering will harm all casinos in Macau. But at the moment Macau continues to set monthly records for turnover.”

The Australian’s John Durie says the predicament that Echo now finds itself in is somewhat overstated if you look at the stock and the benefits for the New South Wales government to side with Packer were simply too good to ignore.

“Echo’s stock price fell 4.3 per cent to $2.91 yesterday and on any analysis it is a screaming buy below $3 when the competition on its reckoning is some nine years away. Echo also received a benefit of sorts, given Crown will pay a $100 million licence fee and pay tax capped at 29 per cent. This also limits the Echo tax at 29 per cent, whereas now it would have progressively increased to more than 50 per cent as business developed. That, of course, is what NSW Premier Barry O’Farrell wants, because casinos have proven reliable sources of government cash no matter what the social consequences may be in the wrong hands. The Crown casino complex is a massive exercise on any measure and the NSW government should relish the boost it promises to provide the state.”

Fairfax’s Elizabeth Knight quantifies just how good the deal is for the O’Farrell government, adding that the true winner was never going to be Packer or Echo, but the state government.

“Regardless of whether competition in the casino market will financially benefit the two rival players, Crown and Echo, the NSW government has extracted a guarantee that James Packer’s outfit will deliver an additional $1 billion in gaming tax payments. Premier Barry O’Farrell can bank this revenue regardless of whether Packer can make a great return. And this is before accounting for any tourism benefits that will come from building a new casino and six-star hotel.”

Business Spectator’s Stephen Bartholomeusz adds that by siding with Packer, the NSW casino landscape will be significantly changed from the current monopoly environment.

“The panel’s logic in opting for competition with a levelled playing field in terms of the tax rate is that the government doesn’t risk any gaming tax revenue if (or rather when) Crown cannibalises Echo’s high-roller business but could benefit significantly as both groups compete to lift their share of an Asian VIP gambling market estimated to be worth $34 billion a year. Australia has about 1 per cent of that market. It wouldn’t have hurt Crown’s pitch that its record in attracting Asian high rollers to its Melbourne complex is far superior to Echo’s, despite The Star casino being located in Sydney, a more naturally compelling destination for high-net-worth tourists. David Murray said Echo had under-performed in the VIP market.”

Meanwhile in political news, Fairfax’s Malcolm Maiden speculates that the comments from Rudd alluding to probable expansion of fiscal policy in the lead-u to the federal election could force Abbott to also spend money for votes. However, Maiden also notices that Rudd’s treasurer Chris Bowen appears to be singing from a different song sheet.

“Here’s Bowen speaking: ‘We stand by our fiscal strategy, which is to return to surplus over the economic cycle. Now, of course, we do that in a responsible way, we do that in response to emerging challenges and difficulties.’ Perhaps that still dovetails with Rudd’s comments: Labor might spend more now and save more later to hit the May budget’s target of a small surplus in 2015-16. Another Bowen comment, that spending decisions have to be ‘within the existing fiscal envelope … you’d only contemplate stimulus if growth was not normal, but it’s close enough to trend for the fiscal rules to be appropriate’ suggests however that despite Rudd’s comments, the new treasurer believes it is business as usual. Expansion, or status quo? Difficult to say.”

The Australian’s economics correspondent Adam Creighton fears the potential for a spending war during the election with Rudd at the helm, adding that the prime minister’s claims about Abbott’s ‘British model’ are misguided to say the least.

“For the record, British Chancellor George Osborne is trimming government spending by only 1 per cent a year in real terms: a massive sum by the standards of Western democracy – more than even Margaret Thatcher ever managed – but small by any objective standard. That such small cuts generate such hysterical reactions is a depressing reminder how dependent on government the West has become. Britain’s public debt ratio stands at 90 per cent of GDP. Surely there’s one economy that has been stimulated enough! Rudd’s criticisms reflect his innate fiscal recklessness and devotion to the discredited, so-called Keynesian idea that debt-fuelled public spending generates prosperity.”

Meanwhile in international economic news, The Australian Financial Review’s Karen Maley reports that the political crisis in Portugal is threatening to rekindle eurozone financial turmoil. Those bond yields for the peripheral European nations have pushed a bit higher.

And The Australian Financial Review’s Angela Macdonald-Smith writes that the question of just how much gas the US could export from the shale boom still hangs over the global energy industry.