Crown faces financial limbo ahead of October licence decision

James Packer’s Crown Resorts could turn into a hotel, restaurant and property company if the Victorian royal commission revoked its licence to operate a casino at its giant site on Melbourne’s Southbank.

Financial analysts also say the company, which earns 70 per cent of its profits from the Melbourne operation, faces the prospect of hundreds of millions of dollars in fines to financial crimes regulator AUSTRAC and a potentially large payment to shareholders who have signed up to a class-action lawsuit.

Crown’s alleged systematic legal and ethical breaches have been detailed to the Victorian royal commission. Credit:Scott McNaughton

Crown’s future financial structure is dependent on the findings of royal commissioner Ray Finkelstein, QC, which are due to be handed down in October. He can suggest to the state regulator that it rip up Crown’s licence, suspend it until the company is fit to run a casino or allow Crown to retain the licence under more strict (and costly) supervision.

Counsel assisting the commission Adrian Finanzio, SC, said Crown was unfit to hold a casino licence, and that executive chairman Helen Coonan and Crown Melbourne boss Xavier Walsh should not be associated with the company.

Market analysts say that if Crown lost the casino licence, it could continue to operate its hotels, though the occupancy levels would drop without the patrons from the casino. The consensus from analysts and investors was that, in that case, a different casino company would need to lease the Melbourne gaming facilities from Crown, which would be able to extract a hefty rent.

This would ultimately change the complexion of Crown, turning it more into a real estate trust than a gaming company.

Wealth manager E&P Financial told investors: “If Crown is removed, they will still own two hotels and would be entitled to commercial rent on the casino building and Crown Towers.”

Leasing out the Melbourne casino would soften the financial impact of losing the gambling licence, but would still cut billions from Crown’s cash flow and market valuation, analysts say. Crown has already told the Victorian government that it could breach its lending covenants if it lost the licence.

In a sign of its precarious financial situation, one source told this masthead the company had aggressively stepped up the marketing of the penthouse in its Barangaroo development in Sydney, which carries a $100 million price tag.

Analysts concede that in the event Crown was found irrevocably unsuitable to hold a licence in Melbourne, it would likely have a domino effect on its suitability to run casinos in Sydney and Perth.

Influential Crown shareholder Rob Luciano, a fund manager at VGI Partners, said the company should be allowed to keep its licence, but must clean up its act. “Crown’s bad actors - be it the board and senior management - should be punished. But the common equity holders, the staff and the patrons should not,” he said.

Until a decision is made in Victoria, Crown remains in limbo. It would be near impossible for the company to raise cash from investors given its biggest shareholder, Mr Packer, is attempting to sell out.

The uncertainty also puts a cloud over two competing takeover offers for the company. Rival Sydney casino Star Entertainment and private equity giant Blackstone both proffered conditional takeover proposals to Crown before the royal commission began.

Crown’s shares fell by another 1.5 per cent on Wednesday to close at $10.31 as investors digested the damning recommendations at the royal commission. About $2 billion has been wiped from Crown’s market value since the royal commission began in May.

The royal commission has uncovered a string of damaging revelations about the company, including widespread breaches of responsible gambling laws and the underpayment of up to $480 million in state taxes.

Billionaire James Packer is Crown’s largest shareholder with a 37 per cent stake. Ms Coonan this week said she would accelerate plans to step aside by October. The company appointed a new chief executive, former LendLease boss Steve McCann, in May.

Gaming analysts have begun revising their valuations and earnings models for the company to account for the possibility of Mr Packer’s Crown being found unsuitable to hold a casino licence in Victoria.

There is some discount for uncertainty embedded in Crown’s share price - which at $10.40 is vastly less than the $13 at which Mr Packer sold a 10 per cent stake a few years ago.

But the discount does not reflect the revocation of the licence in Victoria, nor the risk that other states will follow suit.

Goldman Sachs analysts have named Crown as their least favoured casino stock due to the uncertainty around its Sydney licence, the ongoing regulatory inquiries from the Victorian regulator and AUSTRAC and the elevated compliance costs of remediation.

But one analyst, who preferred to remain anonymous, noted that no new investors were avoiding the stock and a rump of existing institutional shareholders remained bullish.

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Elizabeth Knight comments on companies, markets and the economy.

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