Melco could boost Japan chances via Crown play: brokers

May 31, 2019 Newsdesk Japan, Latest News, Macau, Top of the deck, World  

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Several brokerages suggest the acquisition of a 19.99-percent stake in Australian gaming firm Crown Resorts Ltd might boost the chances of Melco Resorts and Entertainment Ltd in the race for a casino resort licence in Japan.

Nasdaq-listed Melco Resorts said on Thursday it would pay an aggregate of nearly AUD1.76 billion (US$1.22 billion) to acquire 135.35 million shares of Crown Resorts. The transaction is to close in two equal tranches on June 6, and on or before September 30, according to a written statement.

The seller is CPH Crown Holdings Pty Ltd, a company controlled by Australian businessman James Packer. Following completion of the deal, CPH will own approximately 26 percent of Crown Resorts and will continue to be represented on the board of the casino firm, according to a separate statement on Thursday. Crown Resorts’ share price was down 3.8 percent in Friday morning trading in Australia.

In separate notes on Thursday, a number of brokerages said the acquisition of a stake in Crown Resorts could help Melco Resorts’ bid for a licence in Japan.

Melco Resorts has declared itself a contender for a gaming licence in Japan when the government there opens the bidding process for the first casino resorts to be established. The company chairman and chief executive Lawrence Ho Yau Lung has suggested that the capital cost of a resort in Japan could be above US$10 billion. He confirmed recently to GGRAsia the group’s interest in bidding for a licence in the Japanese prefecture of Osaka.

“While Melco will utilise some debt capacity to fund it share purchase, we do not see this as an impediment in Melco’s Japan bid,” said Sanford C. Bernstein Ltd analysts. “In fact, owning an Australian operation may help enhance Melco’s standing in the bid process,” they added.

The Sanford Bernstein team said it expected Melco Resorts to take on an additional US$1.1 billion in debt and use some cash on hand to fund the acquisition of the Crown Resorts stake.

The brokerage added that it expected the interest cost from the new debt “to be largely covered with dividends paid by Crown, so the ongoing carrying cost of the Crown stake should be cash flow neutral (or slightly accretive)”.

Blocking stake

Nomura Instinet LLC said in its Thursday memo that Melco Resorts’ investment in the Australian company “further diversifies the company’s geographic footprint”. Currently, Melco Resorts operates casino properties in Macau and in the Philippines.

“Melco’s global ambitions may boost the company’s chances in Japan,” said the Nomura team.

Brokerage Roth Capital Partners said the deal would move Melco Resorts towards “a full global integrated casino resort company with ‘A grade’ or luxury casino resort ownership”.

“We view Melco’s transition toward a fully international entertainment resort company as helpful to its stock multiple and beneficial for its competitive bid for a casino concession in Japan,” noted the brokerage.

A note from Macquarie Group Ltd suggested that Melco Resorts acquisition “could be a blocking stake” in the Australian casino firm, “limiting competing bidders from acquiring Crown near term”.

“While we expect some corporate synergies, Crown is a mature entity for which we believe much of the cost takeout opportunity has already been seized,” said the Macquarie Group.

Crown Resorts runs a gaming resort in Melbourne, Victoria, one in Perth (pictured), Western Australia, and is developing a third at Barangaroo in Sydney, New South Wales. Crown Resorts also owns and operates Crown London Aspinalls, in the United Kingdom’s capital.

In its Thursday statement, CPH said it remained “very optimistic” about the future prospects of Crown Resorts.

In a prepared statement commenting on the deal, Mr Packer was quoted as saying: “I am still vitally interested in Crown’s success as a world-class resort and gaming business. The sale allows me to continue my long-term involvement with Crown and at the same time to better diversify my investment portfolio.”

Mr Packer added: “I am thrilled Lawrence Ho and Melco have chosen to invest in Crown … Crown is a stronger company with Lawrence and Melco as a strategic shareholder.”

According to Sanford Bernstein, the 19.99-percent acquisition is “most likely” a first step in Melco Resorts eventually “taking a controlling ownership stake and potentially an outright acquisition” of Crown Resorts.

“This may occur through several transactions over time following regulatory approvals. We would hope to see a full acquisition of Crown (at the right price) in the future to limit complexity of Melco (something that has historically plagued the company),” it added.

Melco Resorts said in its Thursday statement that it was open to “the opportunity to increase its ownership in Crown”.

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