James Packer’s Macau casinos suffer setbacks
The opening of his new casino in Macau this week had every bit of glitter James Packer could throw at it: songs by his new girlfriend Mariah Carey, a specially produced short film starring Leonardo DiCaprio, Robert De Niro and Brad Pitt, and directed by Martin Scorsese, all with thanks to Hollywood business partner Brett Ratner.
Guests at the $US3.2 billion Studio City resort marvelled at its “family friendly” features including a 130-metre Ferris wheel, an entertainment centre with cartoon characters such as Tom and Jerry, Superman and Wonder Woman, and a virtual reality ride called Batman Dark Flight.
Yet Studio City’s financial engine room starts with a crippling loss of power. Instead of the 400 gaming tables Packer and local partner Lawrence Ho were expecting up until just a few days before the opening, the Macau authorities have permitted just 250. The partners have been forced to renegotiate with their lenders and two US-based investment funds which own a 40 per cent share.
Has Packer’s luck turned? He’d been on a winning streak in Macau since 2002. The former Portuguese trading post − returned to Chinese sovereignty in 1999 as a “special autonomous region” as neighbouring Hong Kong had been two years earlier − invited new players into its gambling sector, following expiry of a 40-year monopoly held by Stanley Ho, the father of Lawrence.
The Las Vegas casino tycoon Steve Wynn and Hong Kong’s Galaxy Entertainment Group got the first of the new concessions to operate alongside Stanley Ho, bringing a multibillion-dollar Nevada mix of gambling and showbiz to what had previously been a string of seedy casino-hotels, with triad gangsters, loan sharks and prostitutes hovering at the elbows of the punters.
Another Las Vegas magnate, Sheldon Adelson, who had used his political clout in Washington to help Beijing recover from its post-Tiananmen disgrace, got a subconcession from Galaxy. This pointed the way in for Packer’s 50.1 per cent-owned Crown Resorts which runs casinos in Melbourne and Perth. He got a subconcession from Stanley Ho, but with his son Lawrence as partner.
It seemed the best of all worlds. The saturnine, tango-dancing Stanley Ho was one of Beijing’s trusted capitalists, dating from days blockade-running into China during the Korean War. Yet by teaming up with his son, Packer was a generation removed from allegations of organised crime links that had made Stanley Ho a liability in winning gaming licences in the United States, Australia, and other places.
Their Melco Crown joint venture opened its first Macau casino, Altira, in May 2007, to be followed by the bigger City of Dreams. That year Macau surpassed Las Vegas in gaming revenue. It was a zone of tolerance for Chinese authorities, exempt from periodic crackdowns on money laundering and capital flight that hit casinos along the borders with Myanmar, Laos and North Korea. It seemed part of the Communist Party’s deal with the new business class: leave politics to us, and you can blow your money as you like. Macau went on to have seven times the annual gaming revenue of Las Vegas by 2013.
But at the end of 2012, that all started to change. Xi Jinping, son of a revolutionary-era People’s Liberation Army marshal and foremost among China’s Red Second Generation, became Chinese Communist Party chief. Within a year, he started an anti-corruption campaign reminiscent of Mao Zedong’s purges. Capital flight intensified, reaching $US150 billion in the month of August this year alone, spurring tighter crackdowns on the most visible exit route, Macau.
“Under the campaign, Macau’s casinos became prime targets,” says a senior Hong Kong journalist deeply familiar with Macau, who asked not to be named. “The government of Macau is completely under the control of the Communists, like a mainland city. So mainland security organs, including Public Security, State Security and the party’s Discipline Inspection Commission, have access to Macau bank accounts and videos from the VIP rooms of the casinos. Who would dare to bet there?”
Macau’s gaming revenue fell slightly in 2014 and this year is on track to plunge 35 per cent. The result for James Packer is that Crown’s share of Melco Crown’s profits for 2014-15 (July-June), adjusted for abnormalities, fell by 57.6 per cent to $122 million.
Beijing’s grip is not relaxing. “The inherent negative elements of this gaming economy have affected social stability and security in Macau and even mainland China,” declared a senior party apparatchik Li Fei at ceremonies marking the 15th anniversary of the handover from Portugal last December, while Xi Jinping suggested its economy should diversify away from gambling, which was causing “deep-seated problems”.
When Steve Wynn, who opens another casino in Macau in March next year, criticised the last-minute limit on gaming tables at Studio City as “preposterous”, officials called in his local representatives for a dressing down, insisting authorities would “strictly follow” the policy of allowing only a 3 per cent annual growth rate in gaming tables up to 2023 (which happens to be when Xi Jinping’s expected 10 years as party chief will have just ended).
To many observers, it confirms Stanley Ho, now 93 and ailing from a severe stroke, no longer wields his old influence in Beijing. In January, Macau police arrested his nephew and manager at the Hotel Lisboa casino, Alan Ho, along with five other men and 96 women for alleged involvement in a prostitution ring at the hotel. “None of us could believe it. How could Ho not protect him?” the senior journalist said. “Ho’s children remain important investors in the gambling industry but without the privileges and access of their father. Stanley Ho’s guanxi [connections] will largely die with him.”
Packer can expect compensation from Chinese gamblers moving further afield to avoid scrutiny. In its latest year, Crown Resorts reported a 41.8 per cent growth in VIP revenue at its Australian casinos to $956 million, out of total revenue of $3.2 billion, with a profit before tax of $916.5 million. Crown plans new hotel towers in Melbourne and Perth for high rollers and has upgraded its private jet fleet to shuttle them down.
State premiers have been there to help. Last year Victoria’s Denis Napthine removed a “super tax” on VIP revenue and extended Crown’s Melbourne licence for 17 years, until 2050, in return for an upfront payment to state coffers of $250 million and another in 2033.
In New South Wales, Barry O’Farrell announced a new “unsolicited proposal” process tailor-made for Packer to insert his casino-hotel into Sydney’s Barangaroo harbourside redevelopment. This was duly approved, and the existing Star casino monopoly of Echo Entertainment set aside for him (on condition Stanley Ho is not involved). Packer’s planned tower now includes 66 luxury apartments for sale, knocking several hundred million dollars off the $1.5 billion cost.
Further afield Packer has had mixed results. The Stanley Ho connection kept him out of the running for Singapore’s two casinos. Melco Crown did open a City of Dreams casino in Manila in February, but a new government in Sri Lanka vetoed Packer’s proposed casino in Colombo. In Las Vegas, Packer is planning a $US4 billion twin-tower casino-resort, his second try at the US market following a debacle eight years ago that cost Crown and Packer family investors about $2 billion in writedowns. Crown has just lost out to Echo in a tender for Brisbane’s casino.
The biggest prize of all would be Japan, where the estimated ¥20 trillion blasted annually through the vertical pinball machines known as pachinko − ostensibly without hope of reward other than fairground trinkets − suggests annual casino revenue at $US40 billion, close to Macau peak levels. Crown is proposing a casino on a man-made island close to Osaka’s airport.
Shinzō Abe’s government is considering a bill to legalise casinos in time for the 2020 Olympic Games in Tokyo. But there are political obstacles. The public is deeply wary of yakuza (mobsters) already loan-sharking around pachinko addicts, and the ruling Liberal Democratic Party’s coalition partner Komeito is deeply opposed. “There are differing views within the cabinet as well as in the ruling coalition,” says a source close to Abe.
But Abe is keen, as are many other conservatives. Not only would it boost Japan’s revenue, it might draw wealth from rival China. “I am much interested in how Uncle Xi’s anti-corruption campaign is choking China’s economy,” political commentator Hideaki Kase told me. “For the last 3000 years, corruption has provided vital energy to Chinese economic activities. I know that many LDP Diet members are backing the casino bill.”
As the situation tightens in China, Packer is backing it, too.
This article was first published in the print edition of The Saturday Paper on Oct 31, 2015 as "Playing the odds". Subscribe here.