Crown tests casino table manners

Leon Gettler

James Packer is set to become $3.26bn richer after Crown Resorts accepted an $8.9 billion offer to sell its entire Australian casino empire to the world’s biggest private equity firm Blackstone. Under the terms of the offer, Crown shareholders will receive $13.10 a share. The Crown board has unanimously recommended shareholders vote in favour of the transaction. If shareholders and state-based gambling regulators approve the deal, Crown Resorts will be delisted, with Blackstone taking control of the flagship Melbourne Southbank complex, its Perth property, and the $2.3 billion hotel and casino tower at Sydney’s Barangaroo.

Packer doing the deal was inevitable. His hand was effectively forced, following last year’s Victorian royal commission and the NSW Bergin inquiry. The Victorian commission recommended cutting Packer’s stake in Crown from 37% to less than 5%. The state government accepted this along with all other recommendations, so his departure was already locked in.
Added to that was the NSW government backing all recommendations made in its 2020 Bergin inquiry. That included limiting stakes in a casino licensee to 10% unless approved by a new, powerful Independent Casino Commission. Packer’s influence on Crown had been labelled “disastrous” by the NSW investigation. He was regarded as the driving force to secure more of the Chinese high-roller junket tours at the centre of the gaming giant’s money laundering scandal. 

However, Packer has been steadily retreating from public corporate life, stepping down as Crown’s chairman in 2015 and quitting the board in 2018. Then, he tried to sell a 19.9% interest in the company to Hong Kong gambling giant Melco Resorts. The transaction only got halfway through when the NSW inquiry was launched. Mr Packer’s shareholding is worth around $3.2 billion. This is his last major financial connection to Australia. The Packer family had been a major shareholder of Crown and its forerunner, Publishing & Broadcasting Limited, since the mid-1990s. Packer once hoped to make Crown a luxury brand running casinos in Australia, Macau and the United States. But regulatory scrutiny into the group’s misconduct led to him ending his involvement in Crown’s affairs and left a question mark over the future of Crown’s Australian casino operations.

Blackstone is a serious player in this space. In Las Vegas, Blackstone owns the MGM Grand and Mandalay Bay (bought for $US4.6 billion in 2020) and the Bellagio (bought for $US4.25 billion in 2019) - as well as Spanish gambling outfit Cirsa, which has 147 casinos globally, mostly in Latin America.  In 2014, it bought the Cosmopolitan casino and hotel in Las Vegas from Deutsche Bank for $US1.8 billion. It cut costs, improved profitability and sold it for $US5.65 billion in September last year, tripling its investment.  The casino operations were sold to MGM Resorts while the property assets were sold to a group of buyers, including its own Blackstone Real Estate Income Trust.

Blackstone also has a track record in hospitality, It owned Hilton Worldwide for 11 years before selling it in 2018 at a $US14 billion profit. Last year, it bought a controlling stake in UK domestic holiday market leader Bourne Leisure and US hotel operator Extended Stays. It has a portfolio of eight Japanese hotels.

In Australia, Blackstone also has a controlling stake in non-bank lender LaTrobe Financial.

Crown has been a job creation machine in Victoria since it opened in 1997 and is the among the biggest private sector employers in the state. It has more than 15,000 staff across its hotels, function rooms, restaurants and entertainment facilities.

Private equity funds have a track record of cutting costs, lifting profitability and on-selling the acquisition for a substantial profit. Can we expect job losses?

Ben Lee, founding partner of Macau-based IGamix Management and Consulting, which focuses on the gaming industry in Asia, said he did not see Blackstone being the owner of Crown for the long term.

He said it would replicate its strategy at the Cosmopolitan by cutting costs and moving on.
“They are likely to fly in US executives and to slash costs. There’s a lot of fat in the system if you look at the payroll,” Lee said.

Lee said he expects the new management team brought in after the Bergin inquiry in NSW will be replaced.

He also expected some resistance from Australian unions, particularly if it involved floor staff.
“There is potential for a serious clash of cultures,” he said.

Lee said he believes Blackstone will focus more on slots and mass markets. To boost profitability, he said Blackstone will reduce the focus on tables.

In terms of the asset itself, he sees the potential for Blackstone to replicate the strategy it used at Cosmopolitan where the casino operations were split off from the real estate, where both would be on-sold to separate buyers. While the model is used in the US, it is not common in Australia. Blackstone would also consider selling some of the smaller hotels in the portfolio.
One of the issues raised is that once Crown is in private ownership, it will be subject to less scrutiny from regulators and the public.

This was a point raised by journalist, turned shareholder activist and anti-gambling campaigner Stephen Mayne.

“Am against Blackstone buying the business lock, stock and barrel from instos, Packer and 60,000 retail shareholders. Too much transparency will be lost inside the belly of private equity,” Mayne posted on Twitter. Mayne also tweeted that he had emailed all NSW and Victorian MPs raising concerns about Blackstone’s takeover. “Not one bothered to reply,” he said.
The reality however is that Crown is working towards regaining suitability to operate its casinos is Melbourne and Sydney and is waiting for the results of a regulatory probe into its operations in Perth. The NSW and Victorian government brought in regulatory changes and in Sydney, it can’t operate a casino for now.

In Victoria, the final report by commissioner Ray Finkelstein allowed Crown Melbourne to keep its licence for now but recommended the casino company should be given a two-year grace period under the control of a "special manager" to correct an "alarming catalogue of wrongdoing". However, at the end of the grace period, the special manager will recommend to the regulator whether Crown should keep its Victorian casino licence and the regulator will then have to decide whether it is "clearly satisfied" that Crown Melbourne has returned to suitability. Finkelstein said "this will be a tough test to satisfy". At the same time, the Victorian government tabled new laws banning foreign junkets and beefed up the maximum fine for breaching the state's gaming act to $100 million. Beforehand, it was just $1 million.

The NSW government set up an independent casino regulator and has supported all 19 law changes recommended. And unlike Crown Melbourne, Crown’s Sydney casino licence is suspended. Following the Bergin report, the NSW government deemed the company was unfit to run a casino after its Melbourne and Perth businesses were infiltrated by criminal syndicates and money launderers.

Blackstone’s Crown casino operations will be scrutinised by regulators to ensure it is complying with the laws. Otherwise, it will not get a license.

As Fitch Ratings notes, Blackstone will be subject to lengthy probity and other regulatory checks, and it has to be deemed suitable to operate casinos by three different regulators. 
There is still a lot of water to go under this bridge with the deal still needing to be approved by regulators and shareholders. Clearly Crown and Blackstone have their work cut out.