Wednesday, May 16, 2007
Macau is facing a potential oversupply of casinos as James Packer's PBL and other licence holders negotiate fees to allow third parties to open their own casinos in the city, Deutsche Bank has warned.
PBL and Packer's Hong Kong-based partner, Lawrence Ho, are negotiating to allow Las Vegas casino operator David Friedman to operate a casino in the new $2.6 billion Macau Studio City on Macau's Cotai strip.
Under the deal, the joint venture between PBL and Lawrence Ho's Melco will receive a percentage of gross gaming revenue from Mr Friedman, the former chief counsel for Sheldon Adelson's Las Vegas Sands group.
Singapore's CapitaLand is taking a 20 per cent stake in the project, which is scheduled to open in the first quarter of 2009.
The deal is one of an increasing number of franchise arrangements being negotiated by some of the six official licence holders in Macau, with local veteran, Stanley Ho, 85, leading the charge.
Malaysian casino operator Genting International has recently negotiated a deal to build a $1 billion Resorts World Macau under a franchise arrangement with Mr Ho's Sociedade de Jogos de Macau (SJM), following deals with players including Hong Kong-listed firms Emperor Entertainment, Golden Resorts, Century Legend and A-Max.
Stanley Ho also has another franchise arrangement with long-time partner David Chow, operator of Pharaoh's casino.
This has seen the number of casinos operated under Stanley Ho's licence jump from 11 to 17 over the past three years.
Richard Branson's Virgin Group is also reported to be negotiating a deal for a hotel-casino complex in Macau with the Hong Kong-based Galaxy group, another of the six official licence holders. In a research note, Deutsche Bank analyst Karen Tang says the prospect of Branson entering the Macau market highlights the growing number of operators coming into the city who are not licence holders.
Ms Tang points out that Virgin does not have a Macau gaming licence. "As such it will have to form revenue-sharing arrangements with one of the six licence holders to operate the casino.
"The news highlights industry supply risks as non-licence holders can relatively easily enter the market via forming revenue-sharing arrangements with concessionaires.'
Under Macau law the six official licence holders are free to negotiate deals with operators to run casinos under their licence.
While the deals are profitable for the licence holders such as PBL, which will be able to receive revenue from David Friedman's casino with no risk to their own company, they have the potential to drastically increase the supply in the city.
So while Deutsche and others are predicting continued strong growth in the demand for gambling in the city, as China expands the list of cities whose residents are free to travel to Macau, the question is whether margins will be squeezed by a possible oversupply.
"These deals highlight supply-side risks and increase competition for the six licence holders," Ms Tang notes.
The deals come as the official licence holders are also pushing ahead with their own multi-billion-dollar hotel-casino projects. Stanley Ho recently opened his new flagship, the Grand Lisboa, while PBL-Melco are set to open their first Macau casino, the Crown Macau later this year.
Ms Tang notes that the opening date of the Crown Macau casino, which was originally scheduled for late last year, is expected to be delayed again from April until May.
JAMES Packer's Publishing and Broadcasting Ltd will focus on expanding its $9 billion gaming business after splitting into two separate companies later this year, analysts say.
Crown, the new gaming company, will run PBL's casinos in Australia and gambling investments in Asia, North America and Britain. It might be able to raise more than $3.5 billion for acquisitions, UBS AG analyst Nola Hodgson wrote in a note yesterday.
Mr Packer has accelerated PBL's push into gaming since the death of his father, Kerry, 17 months ago. His first casino in Macau opened yesterday, with two more to follow, and he's been buying stakes in gambling venues in Britain, Canada and Las Vegas. The split will allow Mr Packer, Australia's richest man, to focus on Crown, where he will be executive chairman.
"We believe Crown will be even more focused on future transactions as a pure play," Goldman Sachs JBWere analysts Christian Guerra and Adam Alexander said.
Separating Crown and Consolidated Media Holdings was Sydney-based PBL's second major restructure in seven months. In October, Mr Packer sold half of the company's media assets into PBL Media, a venture with buy-out firm CVC Asia Pacific, to raise $4.5 billion to fund his casino expansion as his NineNetwork lost viewers and advertising sales.
Crown would get PBL's "war chest" of $2 billion cash and raise $2 billion in debt to fund a $3-a-share return to investors as part of the split, leaving it with flexibility to add further acquisitions or ventures with international partners, Mr Guerra and Mr Alexander wrote.
"We would expect that Crown will continue to pursue highly leveraged deals," JPMorgan Chase & Co analyst Cameron McKnight said. Crown might also spin off assets into separate investment trusts to free funds for acquisitions and reap management fees, he said.
Crown's shares will be valued at $14.34 and Consolidated Media at $5.07, the average estimate of six analysts shows.
Consolidated Media, which will hold 50 per cent of PBL Media, the owner of Nine and Australia's biggest magazine publisher, as well as stakes in pay TV networks Foxtel and Fox Sports and internet companies, will be run by PBL chief executive John Alexander.
The media business would struggle to expand because it had $3.8 billion in debt and earnings depended on dividends from its investments, Ms Hodgson said.
To release value is just.... - The Age - 11th May 2007
WORDS at the heart of Publishing and Broadcasting Ltd's budget-day announcement of its plan to separate its gaming and media interests into two listed companies suggest it is a valuation issue. That, however, seems to be simply the starting point for James Packer's ambitions.
The logic of splitting PBL is straightforward and indeed is simply an extension of the logic that drove Packer to sell half of PBL Media to CVC Asia Pacific last year, releasing $4.5 billion of cash in the process.
Gaming has increasingly become the focus of Packer's growth plans, with PBL embarking on a frenetic expansion of its activities offshore. It already accounts for 60 per cent of PBL's earnings before interest, tax, depreciation and amortisation, and has far greater growth potential than the more mature core of PBL Media.
The CVC deal, while there was a strong element of opportunism — Packer saw a chance to grab a big lump of capital on terms that, thanks to the frenzy of private equity deals, might never be available again — recognised the looming collision between the ambitions of the two businesses.
It made no sense within the old structure to allocate capital for expansion of PBL Media. Not only was that business low-growth and facing big challenges, but in the wake of the Coonan media law reforms expansion opportunities would be expensive. From PBL's perspective, the case for directing all its discretionary investment into the higher-returning and faster-growing gaming business was compelling.
The CVC deal worked at several levels. It capitalised on the value of the media businesses to a private equity group in the midst of a scramble for cash-generating assets, to create a huge war chest for the expansion of gaming. It also, however, dramatically lowered PBL Media's cost of capital, allowing it seriously to contemplate expansion.
What it didn't do, however, was to break the nexus between gaming and media. Substantial expansion of PBL Media along the lines envisaged by the partners would create the prospect that it would grow relative to the more highly-rated gaming operations and therefore undermine one of the most appealing elements of the transaction.
Substantial growth might also mean PBL was forced to redirect some of the capital it had released back to the media business. Packer wasn't going to dilute PBL's exposure to gaming in order to support PBL Media's growth ambitions.
The formal separation of the two sets of businesses ends the linkage and the conflicts that created for PBL. Moreover, PBL has a messy executive super-structure. Separation allows a clearer allocation of responsibilities and accountabilities.
The demerger will probably see Crown valued more highly than it has been within the present structure but that may not necessarily be at Consolidated Media Holdings' expense.
PBL Media has a raft of new media exposures, as well as Nine Network and PBL's magazines. Within the existing group the interests in Foxtel, Fox Sports, Seek and Ticketek aren't particularly visible. Given that Consolidated Media will own 50 per cent of PBL's old media businesses but fully own its interests in new media, they will get far more attention.
Despite the spate of offshore gambling interests PBL has acquired since the deal with CVC it must have become obvious to Packer that PBL simply had more capital than it could deploy sensibly. It was awash with cash, and that would dampen its performance statistics and value.
Hence, as part of the separation, $2 billion will be returned to shareholders. That will still leave Crown with a near-ungeared balance sheet to fund its growth. The dispersal of the cash sends a clear signal, however: that Packer is not contemplating the much-speculated tilt at Tabcorp or any other large, single target.
Packer himself will extract about $760 million from the restructure. While he apparently plans to use the cash to pay down debt in his privately owned Consolidated Press, it will give him the capacity to support any new capital needs for either of the two demerged entities, in which he will retain a 37 per cent interest. It might also, of course, provide the capital for expansion elsewhere.
With the demerger, Packer will have two separately listed and focused vehicles in different sectors and a foot on a third through his 20 per cent-plus holding in Challenger Financial Services, now a $3 billion company. His privately held hedge fund, Ellerston Capital, is apparently growing rapidly and could, if brought next to Challenger and a range of smaller financial services interests, help create a third pillar for his portfolio.
THE rumours of a BHP Billiton bid for Rio Tinto have subsided almost as quickly as they emerged, with most of the market concluding that a merger is something that perhaps ought to happen rather than something about to happen.
With hindsight, it is obvious that there is no imminent move planned by BHP on Rio or anyone else of substance.
Almost every working day this year BHP has filed a notice disclosing on-market purchases of shares in the British entity with its dual-listed company structure, BHP Billiton plc. There is no way BHP would allow that buyback program to continue while it was planning a major acquisition and, therefore, held extremely market-sensitive information.
The buying is part of a $US10 billion ongoing capital management program, most of it dedicated to acquiring plc shares. Any suspension of that program will, of course, provide an early warning signal that BHP is planning something substantial.