Crown Splits its Aces

The stock in focus this month is Crown (CWN), a gaming and entertainment company with businesses and investments in Australia and overseas. They own and operate two resorts in Melbourne and Perth, comprising hotels, convention centres and gaming floors. Overseas, they operate a high-end casino in London, Aspinalls Club, and own a 27.4% stake (recently reduced from 34.3%) in Melco Crown Entertainment, which owns and operates gaming resorts in Macau and the Philippines. Crown also has two development projects on the horizon, the Sydney Barangaroo Casino and the Alon Casino development in Las Vegas. James Packer is the major shareholder, with Consolidated Press Holdings owning 53% of the company.

In recent years, the Australian operations have performed well, but Crown’s share price has been held back by two main factors. Firstly, the underperformance of Melco Crown Entertainment in the face of a crackdown on corruption and money laundering through Macau casinos by the Chinese government, and secondly, the perceived risk around the capital investment required for the development projects in Sydney and Las Vegas.

The Packer Factor

Market concerns over the influence of Mr Packer (given a number of smaller transactions, such as the purchase of a stake in friend, Robert De Niro’s restaurant business, Nobu), which point to a potential disregard for minority shareholder interests, have also weighed. After consideration by Mr Packer to take the company private was stymied by issues around raising the debt to fund an acquisition, (given the somewhat disparate nature of assets), a restructure was put in place which looks to split the company into two divisions, with the objective of appealing to different types of investors, and thereby unlocking value.

The Proposed Split

The proposed demerger looks to split the company into two, with the international investments (Melco Crown, Aspinalls, Nobu and the Alon development) separated into a new holding company, and the Australian-based assets retained in the other entity. This will enable investors looking for the higher risk international exposure to maintain that, while hopefully leading to a re-rating of the Australian businesses, not only in terms of capital value, but also by allowing for a larger payout ratio and more franking. The further spin-off of the property component of the Australian resorts is contemplated, upon the completion of the initial restructure.

What this means for Investors

We believe the restructure will be a positive for Elston clients who are shareholders of the Crown businesses, as it should address a number of concerns around the existing structure, and allow management to refocus on growing in their core markets. This is reflected in a positive share market reaction to the deal, which will take a while to put in place, with a targeted completion by the end of the year.

QUICK STATS

• Crown Melbourne operates three hotels with 1,600 rooms
• Crown Sydney will cost $2 billion and is expected to be completed in 2021
• In May, Crown reduced its stake in Melco Crown from 34.3% to 27.4% and received $800 million.

If you would like more information, please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.