James Packer’s decision to buy just over $200 million of shares in Crown Ltd to lift his shareholding above 40% has triggered a flurry of speculation as to his motives.
No one inside the Packer camp seems to be prepared to shed any light on why he chose to add to his holding, lifting it from 37% to 40%. That hasn’t stopped the market from trying to rationalise the move.
The various, conflicting theories explaining his purchase range from the fright that Packer received when Kerry Stokes launched a raid on Consolidated Media Holdings (previously assumed to be firmly under Packer’s control) to preparations for a privatisation.
It would have made sense for Packer to have increased his stake, or contemplated a privatisation (as he is said to have done) when Crown shares crashed to their sub-$5 financial crisis nadir after Lehman collapsed last year. It makes less sense when the shares have rebounded to the levels they were trading at immediately before the full implications of the financial crisis became apparent.
It is, of course, conceivable that Packer still regards $9 a share as a bargain price to pay for a stock that he knows intimately, but whose value has been clouded by the massive write-offs associated with Crown’s ill-timed North American gambling investments and the uncertainty around the prospects of its two new casinos in Macau.
However, it might also be the case that Packer is looking forward to Crown’s next wave of expansion and preparing for the day when it may issue dilutive equity to consummate a major deal.
It won’t have escaped Packer’s attention that Tabcorp’s share price is still languishing at crisis levels, flat-lining around the $7 level. The looming loss of its lucrative gaming licence in Victoria in 2012, the impact of online betting rivals and increased product fees on a wagering business whose Victorian licence is also under threat and the $500 million investment in its Star City casino complex in Sydney are weighing on the price.
Former Publishing & Broadcasting chief executive, Peter Yates, revealed in the Four Corners program on Packer this week that PBL had Star City “bought twice” but Kerry Packer had ensured the deals didn’t complete.
It would make considerable sense to merge Star City and Tabcorp’s Queensland casinos into Crown, reducing volatility in outcomes and creating a near-national network of gambling destinations.
Tabcorp itself is known to have looked at demerging its casino business to make such a transaction easier, because it would release the control premium in the business – Crown can’t acquire Tabcorp while it still holds its gaming licence. The wagering business could then be merged with Tatts Group to create a national wagering group.
Any merger of Crown and Tabcorp would inevitably have to involve a significant amount of scrip, which would dilute the Packer shareholding. There would be some sense in his bulking it up at prices that don’t stretch Crown’s valuation in anticipation of an eventual transaction.
Despite some of the silly scuttlebutt about the decline in Packer’s fortunes that was bandied about the market during the crisis, or the premise of the Four Corners program (and the Paul Barry book on Packer that gave rise to the program) that he has blown much of the fortune left him by his father on a wild gamble on gambling in the US, Packer’s listed companies are in very strong shape and his private company is said to be heavily cashed up and lowly geared.
He has turned a lot of assets into cash over the past year, with the splurge on Crown shares evidence that he isn’t cash-strapped.
While Barry might describe Packer’s casino strategy as billion dollar bets and the punting of the fortune built up by his father and grandfather on gaming, that is a misrepresentation of Packer’s approach and indeed the outcomes.
Kerry Packer was both a punter and a value investor prepared to buy anything low and to sell anything high, although he did have an emotional attachment to the family’s traditional media businesses, particularly television. There wasn’t much strategy involved.
James follows strategies. The new media investments PBL made – Seek, Carsales, Foxtel and the like – were James’ projects and part of a well-developed view about the future (or lack of it) of traditional media. He acquired Crown and Burswood and developed a highly successful and value-accretive gaming strategy despite his father’s reservations and, in the case of Burswood, strident objections.
That takeover is said to have played a significant role in the abrupt departure of Yates as PBL’s CEO and the re-emergence, from his sick bed, of Kerry, who appointed himself deputy chairman of PBL to James.
The Macau casinos and the plunge into North America were designed to create an international casinos business, not just to leverage Crown’s expertise but because it would spread and hedge Crown’s bets and dampen the volatility inherent in a business largely reliant on one site.
Gambling businesses are all about big numbers – the bigger they are the more likely the house will win and the more likely it is that the win rate will be close to the theoretical.
The North American spree – a year or so before the crisis emerged – turned out to be poorly timed and has led to $1.5 billion of write-offs. However, had Packer not sold PBL’s old media businesses at the peak of the bubble and generated $5 billion or so of cash he would have lost a lot more.
The Four Corners program might have portrayed James as a reckless punter who squandered the family fortune on a wild gambling spree but, given what happened in global markets and economies over the past year, he’s actually come out of the episode in pretty good shape for someone who, because he is committed to long-term strategies, was never going to cash out all his exposures to the market or his businesses.
While the North American investments have been written down to virtually nothing – and some of the smaller stakes in other casino groups and projects are probably worthless and should probably not have been made even in the pre-crisis environment – the Gateway joint venture with Macquarie Group in Canada, and a complicated and expensive interest and option arrangement over the Cannery casino group in the US, could potentially have significant value in future.
Crown’s financial strength has, in fact, sparked an expectation that Packer will go again, this time exploiting the distressed condition of the US gambling sector to buy far more cheaply and strategically.
The most obvious buy, and the safest buy, of course, lies closer to home. Whether or not the decision to top up his Crown stake is related to an ambition to acquire Tabcorp’s casinos isn’t clear and may not be for quite some time. However, a bigger holding in Crown would help him maintain his control over a much larger group with a bigger capital base.
This article first appeared on Business Spectator.
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