The interest of United States-based casino operator Wynn Resorts Ltd in acquiring Australian casino firm Crown Resorts Ltd in a possible US$7-billion deal could be a case of “get bigger or get bought”. That is according to a Tuesday note from brokerage Union Gaming Securities LLC.
“If Wynn Resorts acquired Crown, not only would the larger enterprise become a more difficult target but it would deter potential suitors,” wrote analyst John DeCree.
Brokerage Sanford C. Bernstein Ltd expressed a similar view in a Tuesday note. “While we are somewhat perplexed as to why Wynn Resorts would be interested in acquiring Crown as an acquisition deviates from historical organic growth strategy, we see there may be merit in an acquisition,” wrote analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu.
It might be “partly a possible defensive strategy for Wynn Resorts to fend off any potential acquirers,” they added. “Wynn Resorts’ Macau and Las Vegas assets are crown jewels in the gaming industry, and an acquisition of Wynn Resorts has been discussed by investors,” noted Sanford Bernstein.
Wynn Resorts’ U.S.-based peers such as Las Vegas Sands Corp – linked in 2015 with a possible move for Wynn Resorts – and MGM Resorts International would “probably have little to no strategic interest in Australia, making Wynn Resorts a less attractive target,” stated Union Gaming’s Mr DeCree.
Crown Resorts currently owns two casinos in Australia, namely in Melbourne and Perth. The firm also has development projects in Sydney and Melbourne. In addition, it operates a casino in London, in the United Kingdom.
The “stringent regulatory probity” in Australia would be likely to keep potential international suitors such as Macau casino operator Galaxy Entertainment Group Ltd or Malaysian multinational casino investor Genting group “at bay from pursuing Wynn Resorts,” added Union Gaming.
A potential motivation among some suitors of Wynn Resorts itself, might be acquisition of Macau gaming rights, said Union Gaming.
Wynn Resorts is the parent of Macau casino operator Wynn Macau Ltd. The latter’s current Macau permit runs until 2022 and a number of analysts think the current six Macau operators are likely to be allowed to stay in the market after that, barring some major run-in between them and the local authorities.
“The Wynn [group] Las Vegas and Macau assets are highly sought after. Acquisition is likely the only way for a new entrant to gain exposure to Macau as the government has little desire to issue any new concessions, especially to a foreign company,” suggested Mr DeCree.
Any such acquisition move would still need approval from the city’s government. Additionally, Macau Law 16/2001 says that neither a Macau gaming concessionaire, nor any Macau gaming concessionaire’s shareholder with a stake of 5 percent or more in that business, can control a stake of 5 percent or more in any other local gaming concessionaire, be it directly or indirectly.
In March last year Galaxy Entertainment acquired an estimated 5-percent stake in Wynn Resorts.
The purchase was around the time that former Wynn Resorts chairman and chief executive Steve Wynn reached an agreement to sell his remaining shares in the company.
Crown Resorts and China
Some potential benefit to Crown Resorts from a Wynn Resorts takeover could be wiping the slate clean regarding the Australian firm’s reputation in China, said Union Gaming.
“There may be solid synergies with respect to Chinese customers,” added Sanford Bernstein.
In October 2016 several Crown Resorts representatives – including Jason O’Connor, executive vice president of “VIP international” business, were detained in mainland China for alleged “gambling crimes”. They were later held in custody for months prior to summer-2017 court hearings in Shanghai, where a number received jail sentences backdated to cover their period of incarceration
If a takeover of Crown Resorts by a Macau concessionaire were “viewed favourably” by China, it could provide a “material boost to Crown’s current VIP-centric expansion plans in Sydney,” stated Union Gaming.
“However, if China doesn’t view the NewCo as an entirely new entity, it could draw unwanted attention to Wynn Resorts and its superior VIP programme, or add uncertainty to its prospect of renewing its concession in Macau,” suggested Mr DeCree.
“If we assume an 11x [EBITDA] multiple on the NewCo, there would be an estimated 25 percent upside in the current share price of Wynn Resorts. We suspect there would be some best-practice synergies, especially on the VIP front, and some basic public company cost synergies. However, Wynn Resorts has historically been a development company, which could create a longer and choppier integration timeline,” added Mr DeCree.
Wynn Resorts has been roiled by regulatory issues in the U.S. states of Nevada – where it has its core U.S. operations – and Massachusetts, where it hopes to open a new US$2.6-billion Encore Boston Harbor property – since the February 2018 resignation of the group’s founder Mr Wynn amid multiple allegations of sexual misconduct, albeit they have been denied by him.
Wynn Resorts has denied that such controversy is likely to harm it as the group pitches for a Japan casino licence, although some commentators have said it is hardly a positive selling point for the brand in that context.
A figure of as much as US$10 billion has been mentioned by MGM Resorts as the likely cost of building a Japan resort. Up to three such properties will be allowed by Japan in a first phase of liberalisation.
Mr DeCree noted in his Tuesday memo that with Japan “becoming increasingly competitive (and expensive),” the Crown Resorts acquisition route – valued at circa US$7.1-billion from information contained in a Tuesday press release by Crown Resorts – “could be an alternative growth avenue for Wynn Resorts”.
According to Sanford Bernstein, while acquiring Crown Resorts “does expose Wynn Resorts to development risk of Crown Sydney, introduces Wynn Resorts to a slow growth Australian gaming market [and] increases debt, the synergies may be positive.”
The brokerage added that such deal “could also signal to Japan that Wynn Resorts is a larger, more serious candidate and Massachusetts may think twice about implementing harsh conditions on the licence.”
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Vitaly Umansky, Eunice Lee and Kelsey Zhu
Sanford Bernstein analysts