Shareholders in James Packer’s gaming company, Crown, are continuing to pay for the adventures of Mr Packer and his managers in the tanking US gambling sector.
Crown has revealed an expensive way of getting off a rather nasty hook and postponing the high-priced purchase of casinos in Nevada and a racetrack and gaming palace in Pennsylvania.
The US vendors and Crown have announced the termination of an earlier USD 1.75 billion deal to by a company called The Cannery, which owned the casinos in Las Vegas and the Meadows racetrack complex: the cost, a USD 50 million break fee paid by Crown to Millennium Gaming and an affiliate of Oaktree Capital Management, the vendors of the casinos.
In its place a new deal that might not even happen, but which gives Crown a lower priced shot at the deal if it does.
In fact it could end up with a bit of a silver lining, if Crown and Mr Packer are lucky enough to ride out the slump in US gaming which seems to be deepening.
Now Crown seems to have bought itself time, a cheaper price and the possibility of a cheaper exit strategy than previously revealed.
They could end up with just under 25% of the Cannery group for the payment of around USD 390 million, if the recast full purchase doesn’t proceed.
And that is considerably cheaper than the original USD 1.75 billion price which Crown seemed on the hook for.
Crown’s deal to pay around USD 400 million (AUD 617 million) to save the company from having to go ahead with the original USD 1.75 billion US casino deal was a face-saver for Crown and the vendors and was liked by local investors who pushed Crown shares up 13% on Friday to USD 5.90.
The new deal gives Crown three options: a minority 4% stake (if the regulator in Nevada or Pennsylvania rejects its application), a 24.5% stake, or full control within two years with a minimal break fee.
If regulators don’t approve the new deal, Crown will be forced to pay a total of USD 290 million made up of break fees and the price of a compulsory 4% holding.
Provided regulators in Nevada and Pennsylvania approve the deal Crown can pay a total of USD 370 million to delay the settlement of its purchase of the three US casinos for as long as two years.
Of this, USD 320 million will remain in an escrow account ready to be converted into a 24.5% stake in the company, when market conditions improve. In many ways it’s like an option arrangement.
The worth of waiting was underlined over the weekend when it became known that the much larger Harrahs casino group is now warning of the dangers of bankruptcy.
According to a funding document released on Friday and reported on Bloomberg, Harrah’s, which had AUD 24.1 billion of long-term debt at the end of September 2008, said it’s at risk of following suit.
„We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to draw under our senior secured credit facilities or otherwise, in an amount sufficient to fund our liquidity needs,“ Harrah’s said in the document. The casino company last month sought to borrow the remaining AUD 740 million available in its AUD 2 billion revolving bank line,“ Bloomberg reported.
And the problems in Las Vegas of falling gambling revenues is not going away.
Casino proceeds on the Las Vegas strip fell 15% to USD 510.4 million in January, according to a report from Nevada’s Gaming Control Board last week.
More importantly it was the 13th straight month of declines in winnings in January. Statewide, Nevada reported USD 908.6 million in revenues, down 14.6% compared with January 2008.
The USD 908.6 million win in January was the amount left in casino accounts after gamblers had bet USD 12.3 billion during the month, including USD 9.6 billion in poker machine bets and the rest on table games. The betting total is down about 3% over the year to January.
The announcement reveals the settlement of a developing argument between the sellers and Crown, which emerged into the daylight after an attempt by some parties to the Crown camp to withdraw the applications for approval by the Pennsylvania Gaming Control Board.
It later turned out that the mystery party was James Packer’s sister Gretel, and three trusts believed to be linked to her children and herself and holdings in Mr Packer’s private company.
Millennium Gaming last month threatened to sue Gretel Packer over her application, and said it would claim a „significant“ amount, believed to be more than USD 1 billion if she succeeded withdrawing her application for clearance and this ended up terminating the deal. The Americans had suggested in media comments that Ms Packer’s application and those from the trusts was an attempt by Crown and James Packer to wriggle out of the increasingly onerous deal.
The deal had been approved in Nevada. Pennsylvania was poised to announce its decision on whether Crown can be licenced and hadn’t ruled on Ms Packer’s application, or those from the trusts. It was claimed that she was uncomfortable with the level of scrutiny in the probity hearings, but she had been questioned by investigators for both Nevada and Pennsylvania before the application to withdraw was made.
The approval process starts all over again.
In the recent Crown interim profit statement, there were write offs and losses of AUD 547 million in non-cash items. These were mainly the writing down of the value of gaming assets in the US (Las Vegas), the UK and Canada.
So the losses are now over AUD 600 million.
But Crown says its debt will only be AUD 600 million once the various parts of the latest deal are sorted out.