how property boom gives board an ace in Blackstone bid

Crown’s apartment sales windfall came amid a broader pick-up in property prices that continue to amaze.

Sydney set a record for the most expensive apartment ever sold at auction last Saturday, when online gambling baron Joshua Chan paid $20.1 million for a penthouse at Bondi Beach.

Still, it’s worth noting that sales of the 82 residences at One Barangaroo started slowly; three years ago, only a quarter of the super-expensive pads had been sold, including one to Packer, who paid $60 million for an apartment that took out a whole floor of the building.

But van Tuil clearly held her nerve, kept prices high and delivered the goods for Crown – even with her possible target market reduced by the COVID-19 restrictions on international travel.

High-rise sales mean lower debt

The better than anticipated apartment sales result does two things for Crown.

First, it cuts the total cost of the $2.2 billion project to a net figure of $1.1 billion. And second, as the cash from settlements rolls in over the rest of calendar 2021 and Crown’s big investment in the Sydney casino comes to an end, the group’s debt will keep coming down.

Indeed, Macquarie tips net debt to fall from $1.3 billion at June 30 this year to $403 million by the end of the 2022 financial year, and to $25 million by the end of the 2023 financial year.

Thinking laterally and breaking broker consensus down further, Crown should switch to a net cash position by the end of calendar 2022 – and that’s after paying $250 million in dividends.

To be effectively debt free in late 2022 or early 2023 – as cash flow ramps back up in Melbourne and Perth after COVID-19 and Sydney is finally up and running – would only underscore Crown’s already strong balance sheet.

Some Crown investors argue that even in the absence of a takeover bid, the company’s improving debt position would have eventually seen its share price re-rate, particularly as dividend payments were restarted.

But with Crown now firmly in play, the debt issue will become a central plank in the push by the board and its bankers to either get Blackstone to raise its $11.85-a-share offer or to extract a bigger deal from another suitor.

Crown chasing better offer

The strength of Crown’s balance sheet would theoretically allow Blackstone to use the mountains of ultra-cheap debt floating around the world to turbocharge the potential returns from its Crown deal.

You can expect Crown’s bankers to argue that possibility needs to be more fully reflected in Blackstone’s offer price.

JPMorgan analyst Don Carducci, who sees net debt falling to $268 million by 2023, has run some interesting numbers on the sort of valuation Crown could attract based on international earnings multiples over the next few years.

The median valuation multiple for global casino companies based on their 2023 earnings before interest, tax, depreciation and amortisation is 11.2 times, which would value Crown about $13.60 a share.

But Carducci points out that historically the average multiple in global casino deals is about 9.5 times, which implies a valuation of $11.50 a share, which is below Blackstone’s existing offer.

On that basis, Crown investors hoping Blackstone goes to $14 or $15 a share may well be disappointed. Getting an offer with a $12 in front of it might be more realistic – unless some competitive tension can be injected into this auction.

But Crown bulls insist that the Crown of 2023 will be a very different beast to the Crown of today.

Its regulatory woes should be behind it, its governance should be as good as its assets are, its debt will be low and the cash will be flowing.

As with any takeover, it’s the gap between reality and expectation that Blackstone and Crown will need to close.

While Blackstone’s track record in running US casinos (and passing the strict probity tests in Nevada, the home state of Las Vegas) will probably appeal to Australian regulators fed up with Crown’s poor governance standards, some observers question whether the capital structure Blackstone would typically use in a deal like this – that is, a structure with higher debt levels than Crown has typically employed – might give regulators cause for concern.

Blackstone’s famous mantra – buy it, fix it, sell it – doesn’t exactly scream “long-term owner”. Which is why Carducci and others still see a scenario where Blackstone brings in a joint venture partner to operate the casino, while it takes the underlying properties.

This is a tactic Blackstone has used successfully in Las Vegas. Carducci says Crown’s Sydney rival, The Star Entertainment Group, could be a good JV partner and could earn as much as $103.5 million per annum managing Crown’s casinos.

“This provides The Star with a significant value-creation opportunity without having to independently bid for Crown,” he says.

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