Star Entertainment Group has upped the stakes in the takeover battle for the troubled Crown Resorts, launching an unsolicited merger bid that, if successful, would create a $12 billion gambling behemoth. By Michael Sainsbury.

Takeover fight for Crown Resorts

The Star, in Sydney’s Pyrmont. Jean-Philippe Menard / Shutterstock
The Star, in Sydney’s Pyrmont. Jean-Philippe Menard / Shutterstock
Credit: Jean-Philippe Menard / Shutterstock

In the autumn of 2013, frustrated in its attempts to gain a foothold in Sydney, the country’s largest gambling market, James Packer’s Crown Resorts, sold down its shareholding in the Star Entertainment Group’s (SEG) parent company, Echo Entertainment. Crown then proceeded to launch a pitched and very public battle against SEG, Sydney’s monopoly casino operator.

Already the sole casino operator in Melbourne and Perth, Packer had always wanted a casino and concomitant luxury hotel, now known as “integrated resorts”, in his home town of Sydney. The scion brought his family’s unparalleled political heft to the battle and comprehensively outlobbied SEG.

The New South Wales government handed Crown the licence to build a casino on Sydney’s waterfront at Barangaroo, inside the city’s tallest building, without a public tender. The casino would become the centrepiece of Sydney’s biggest single property development, around which controversy continues to swirl.

Then, on Monday this past week, having telegraphed the move to journalists a day earlier, SEG flipped the tables on Packer, lobbing an unsolicited merger bid on the desk of Crown’s beleaguered executive chairman, Helen Coonan. It was a counter to the freshly sweetened offer from United States private equity giant the Blackstone Group, already Crown’s second-largest shareholder with 10 per cent.

If successful, the Crown–SEG merger would create a $12 billion gambling giant, lodged firmly in the Australian Securities Exchange top-50 companies.

SEG has long been a rival of Crown. Chaired by John O’Neill, known best for his time as a football administrator across both rugby league and soccer, the company operates The Star in Sydney’s Pyrmont, as well as casinos in Brisbane and on the Gold Coast. Former Macquarie heavyweight Richard Sheppard and former Business Council of Australia chief executive Katie Lahey are among SEG’s slick, professional board.

The company had been working with Blackstone, but the two parted ways earlier this year. In March, Blackstone went it alone with a low-ball bid, valuing Crown at $11.85 a share, later upped to $12.35 a share. Another US private equity group, Oaktree Capital Management, has also weighed in with a $3 billion war chest to help Crown buy back Packer’s shares.

This is good news for Crown shareholders, who have watched as the company has fallen into disarray. The past five years have been a slow-motion train wreck, which began in 2016 when 18 of Crown’s employees were detained by the Chinese government for nine months.

These arrests piqued the interest of the Australian media, which began looking more closely at the company’s operations. A series of damaging media reports in the Nine newspapers following Crown’s China misadventures revealed an arrogant macho culture, underpinned by a disregard for the rules, that enabled organised crime.

Crown’s licence to operate its casino in Sydney was suspended in February 2021, after a 10-month inquiry instigated by the NSW Independent Liquor and Gaming Authority (ILGA), which was triggered by these media reports. Crown has been working furiously for the past three months to implement reforms that could allow it to regain this licence.

But the ILGA chairman, Philip Crawford, has been keen not to push the Crown process too quickly and has made clear he will take his own counsel on any new ownership.

For its part, Blackstone has casino operations in the US, Spain and Colombia that would require investigation by the ILGA and, as such, there is no time frame around an end game.

Crown faces the unprecedented threat of two parallel state royal commissions into its operations, in Victoria and Western Australia. There is also a looming investigation by the federal money tracking agency, Austrac, into money laundering, which could stretch out into years of uncertainty for the company.

This can only have emboldened Crown’s suitors. SEG has claimed its cash and shares bid values Crown at more than $14 a share – a level the casino giant last reached, very briefly, in 2018. SEG’s claim makes, as many have noted, the heroic assumption the synergies between the two groups would amount to between $150 million and $200 million a year.

It’s a bid underpinned, like much current corporate mergers and acquisitions action on the Australian Securities Exchange, by the federal government’s JobKeeper cash spray, which saw $64.9 million go to SEG’s employees in the 2020 financial year. The company’s board has come under fire for standing down 9000 workers while paying bonuses worth a combined $1.4 million to its executives last year.

Crown’s board has been dramatically slimmed following a string of departures following the NSW inquiry. While Coonan has stayed on as the board’s chair, she has been one of only four directors, a bare quorum.

She has approached the daunting task with her traditional gusto – adding two new directors, Nigel Morrison and Bruce Carter, and installing outgoing Lendlease chief Steve McCann as chief executive officer. However, with a merger on the cards, and a payday between $5 million and $7 million, McCann may prove to be a very expensive short-term choice.

Despite being reduced to a supporting role, at least officially, James Packer and his controlling stake remain the prize for any potential Crown investor. The mogul has been through the personal wringer in recent years, including enduring mental health battles. While he may hang on to a stake in a merged Crown/SEG, he appears set to gently fade from the industry he helped to create in Australia.

But a bid that satisfies shareholders still has a major hurdle in the shape of the Australian Competition and Consumer Commission (ACCC).

“We will do a detailed investigation. It will be a public review,” ACCC chairman Rod Sims told the Nine newspapers this week. “It’s very early days. But we would look at the market for domestic table game customers … We would look at the competition between Barangaroo and Star in Sydney.

“We would also look at the extent to which there is intercity competition for customers.”

On paper, that would be a tough ask.

The merged group would run the major casinos in south-east Queensland, Sydney, Melbourne and Perth. But the ACCC has some form. The argument goes that as casino prices – in the form of the odds the games its customers play – are all tightly regulated, price competition does not exist in the sector.

There is a parallel, too, in the 2002 deal between Telstra and Optus to merge their pay TV arms, which gained a begrudging signoff by the ACCC that recognised the high barriers to entry and significant existing infrastructure spend.

The Alliance for Gambling Reform (AFGR) has already raised concerns about Barangaroo this week, and believes that “now is the ideal time for the NSW government to press reset, to abandon the concept of a casino at Barangaroo, and reduce gambling harm”.

“We know that Crown had captured the regulator and both sides of politics in Victoria and we may well see that is the case in Western Australia,” AFGR chief advocate Tim Costello told The Saturday Paper. “Crown only got found out because of their arrogance and impunity. Justice Bergin was not captured and found that Crown was enabling organised crime.”

Still, Costello says he takes heart from Britain’s “know-your-customer model”, which the commissioner of the NSW inquiry, Patricia Bergin SC, recommended for Crown, along with a cashless card that allows real-time visibility of the problem gamblers, who provide 50 cents in every gambling dollar in Australia.

The AFGR also raises concerns over that key caveat in the original deal between the NSW government, SEG and Crown, which placed a moratorium on poker machines at Barangaroo until 2041. NSW already has more gambling machines than any state outside Nevada, home to Las Vegas. Australians lose about $15 billion a year on poker machines, with loss rates rising since the start of the pandemic.

That was all fine, according to pre-pandemic Crown. It had retooled its Sydney gambling den as an exclusive high-rollers’ venue to complement its six-star hotel. But now the wheels have well and truly come off, with the country’s borders shut to wealthy foreign gamblers until 2022 at least.

Late this week, both Crown Sydney and SEG agreed with the ILGA to go cashless. Crown will also phase out cash in Melbourne and Perth.

“We’ve extended the liquor licence until the end of October. And I think you can assume that we are hopeful and/or confident that the opening of the gaming rooms will happen well in advance of the end of October,” the ILGA’s Philip Crawford said in a media conference on Thursday.

Meanwhile, the escalating rhetoric of Crown’s long-time political supporters in the Coalition against China’s ruling Communist Party has triggered a one-sided trade war. Xi Jinping’s government has demonstrated it can slow the stream of high rollers into Macau and is hardly a fan of Crown. If tensions further escalate, it’s not unfathomable that Beijing could consider limiting gambling trips to Australia.

The battle for Crown is not over yet, but few will be surprised if power in Australia’s gambling industry becomes more, rather than less, concentrated after its sale.

On a political level, the Australian gambling lobby demonstrated how willing it is to flex its political muscle in the 2018 Tasmanian election, pouring $20 million into a campaign against a Labor Party promising gambling reform.

From a competition perspective, a Crown–SEG merger would see an even more powerful group emerge, with a shareholder register limited to a maximum of 9.9 per cent by any one group and presently headed by one of Australia’s largest fund management companies, Perpetual Ltd.

“Star has gone under the radar but there has not been a serious investigation,” Costello says. “I would be surprised if there was not plenty of smoke. Both sides of politics have always benefited from gambling, so no one really wants to know.”

As for the Barangaroo site, Costello says it would make “a great social housing project”.

This article was first published in the print edition of The Saturday Paper on May 15, 2021 as "Crown duels".

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Michael Sainsbury is a freelance journalist and former foreign correspondent with 25 years' experience writing about politics and business.

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