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Wednesday, November 30, 2022

Crown Enters End Game in A$8.9 Billion Sale to Blackstone

Australian casino chain Crown Resorts (ASX:CWN) and (CWLDF) said on Monday that it will enter into an “implementation deed” that confirms the company’s sale to Blackstone (BX) .

The world’s largest private-equity investor is paying A$13.10 per share in cash for all the shares in Crown. Trading in Crown was suspended today, with the stock closing Friday at A$12.64. The deal values Crown at A$8.9 billion (US$6.3 billion).

The buyout paves the way for the exit of controversial billionaire James Packer. Packer, son of the larger-than-life tycoon Kerry Packer, was a jet-setting staple of the tabloid press, and for much of 2016 was engaged to marry the singer Mariah Carey. But after a series of setbacks, he has largely exited public life. He no longer has any representation at Crown, but still owns a 36.8% stake.

I wrote in mid-January about how Blackstone is bidding to become the largest casino operator in Australia. That’s now set to come to pass. Blackstone has walked up its original bid from its opening salvo at A$11.85 in March 2021.

Shareholders must still approve the deal, which the board unanimously recommends, bar a better offer coming in. If all goes well, that vote should come in Q2 and support the sale, which would then close.

Blackstone already owns 9.99% of Crown. Of course, it is a savvy buyer that sees a bargain, buying a company that had been knocked to its knees.

Crown suffered the baddest of bad beats in February 2021 when a government-led inquiry determined that Crown is “unsuitable” to hold a gambling license. The report by former judge Patricia Bergin concluded that Crown had facilitated money laundering and chased business deals with partners who have ties to Chinese triad gangsters and other organized-crime groups.

The timing couldn’t have been worse. Crown was in the process of opening the tallest skyscraper in Sydney, the flashy 75-floor Crown Sydney, which is supposed to have a massive casino floor. The tables and “pokies” remain shut off, while the hotel and restaurants are up and running.

After the state of New South Wales decided Crown, in its current form, probably shouldn’t be handed the keys to a casino in Sydney, the states of Victoria and Western Australia piled on. Crown has long-running casinos in Melbourne and Perth, so those jurisdictions launched inquiries of their own.

Crown shares never behaved like a casino operator that has been told it should under no circumstances be allowed to be a casino operator. The shares fell a very modest 5.1% in the days leading up to the Sydney review findings by the state Independent Liquor & Gaming Authority. Blackstone pounced with Crown trading at A$9.69.

Pre-Covid, Crown shares were trading at A$13.18 in November 2019, much the same price that Blackstone would be paying. They were knocked as low as A$6.00 when Australia implemented some of the harshest and longest-running lockdowns against the pandemic.

Crown has had a clearout of management and the board. New chairman Ziggy Switkowski, the former CEO of Aussie telecom Telstra (ASX:TLS) and  (TTRAF)  , and who took over in November, notes that the A$13.10 price promises certainty for shareholders, making this an “attractive outcome.”

The Crown board rejected two prior offers from Blackstone. Wynn Resorts (WYNN) and also rival Aussie casino operator Star Entertainment Group (ASX:SGR) and (EHGRF) have engaged in talks with Crown about a buyout in the past, while Oaktree Capital Management tabled a A$3.1 billion (A$2.2 billion) bailout plan involving convertible debt to buy out Packer. But there’s no wind of an improved offer coming now.

James Packer launched Crown Resorts in 2007, at which point he was Australia’s richest person. He inherited a media empire started by his grandfather, the journalist Frank Packer. It was taken to Rupert Murdoch-levels of fame by his father, Kerry Packer.

Kerry rivalled Murdoch for influence inside Australia at the time of his death. He was a huge man, figuratively and literally. Malcolm Turnbull, who went on to become Aussie prime minister, says Kerry once threatened to have him killed when a media takeover deal went wrong. Kerry once won A$33 million at the MGM Grand in Las Vegas – but also lost A$28 million over a three-day losing streak in London casinos, the largest loss ever reported in British gambling history.

Perhaps the best story is that a Texan tycoon once tried to goad Kerry into a game of poker at the Bellagio by bragging that he was worth US$100 million. Details vary, but according to Bobby Baldwin, then the boss of Bellagio operator Mirage Resorts, Kerry told the Texan, “If you really want to gamble, I’ll flip you for it.” At which point the loudmouth at the next-door table turned back to his game.

So gambling is in the blood of James, who sold off his empire’s media holdings to concentrate on casinos and hospitality following the death of his father in 2005. His attempts to expand into Macau by forming a partnership in 2004 with Lawrence Ho, the son of the gambling magnate Stanley Ho, were initially a considerable success. But their Melco Crown Entertainment joint venture ran aground in 2016, when the Chinese authorities arrested 16 Crown employees for recruiting big-time “whale” gamblers out of a residential building in China, where it’s illegal to solicit gambling.

James Packer was originally looking to sell partner Lawrence Ho just under 20% of Crown, at which point Ho might have made a bid for the entire company. But Australian regulators started to question Ho’s involvement. That’s because Lawrence’s father indirectly held a small part of his son’s operation via a company that was banned from doing business in Australia. Stanley Ho, who has since died, once led a monopoly consortium running gambling in Macau, where Chinese triads have long operated the less-salubrious parts of the city’s economy.

Packer resigned as executive chairman of Crown in 2018, citing mental-health issues. He still has a fortune of US$3.6 billion, according to Forbes, good for No. 9 on Australia’s rich list. But he told a licensing hearing that he has bipolar disorder, and blames his “medical state” for sending “shameful” and “disgraceful” threatening emails surrounding a take-private plan.

Regulators have made it pretty clear they want Packer to sell out as a condition of ensuring the smooth operation of Crown’s casinos, including the issuance of a Sydney license. Blackstone has made approval by the three gambling regulators involved as well as Australia’s Foreign Investment Review Board all necessary for the deal to proceed.

Packer would walk away with about A$3.3 billion (US$2.3 billion) from the Blackstone sale. Packer has so far declined to comment, but his support would be key in reaching the necessary 75% approval from shareholders. Packer has where possible withdrawn from public life, but it will be interesting to see what course of action he takes if he is completely divorced from Crown.

Australian shares diverged from their Asian brethren on Monday, with rising commodity prices driving the S&P/ASX 200 Index up 0.4%. Oil producers benefitted from rising crude prices, while Aussie gold miners are benefitting from the flight toward the shiny stuff from “gold bugs.” Buying an inert asset never made any sense to me…

That was in contrast with markets in Japan in particular, where trading resumed with a sharp drop following the National Foundation Day holiday on Friday. The broad Topix index ended the day down 1.7% in Tokyo, with the Nikkei 225 big-cap index faring even worse, posting a 2.3% fall.

Almost all other Asia Pacific markets were in the red, following through on Wall Street’s selloff on Friday. Asian central banks, though, have been far less worried about inflation than their counterparts in the West. So wholesale interest-rate hikes in Asia are unlikely, while Japan is seeking to encourage 2% inflation and China is in policy-easing mode to offset a slowing economy.

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