Heavy Weighs The Crown
Sam Triantafillopoulos
Introduction
One might be forgiven for having dismissed the effects of regulatory infractions on public companies after the Commonwealth’s Royal Commission into banking and superannuation in 2019. Despite the soundbites and unsavoury accounts, all four major banks recovered in the days after the handing down of Commissioner Hayne’s final recommendations. Despite the shaking up of the financial advice sector, major financial institutions incurred more of a retooling than a rebuild; industry naturally saw the steps that followed as innocuous, with major players being saved the worst.
On balance this is most likely because the repercussions to the economy and the consumer credit market would be so beyond the pale that remedying plaintiffs without defanging perpetrators remains the only feasible option. Not so for Crown. Following the inquiry by the Independent Liquor & Gaming Authority which upended Crown’s VIP only operations in Barangaroo, Victoria’s Royal Commission has struck at the heart of the domestic gaming giant. While Crown remains Victoria’s largest single-site employer, losing its gaming licence would naturally result in drastically more isolated effects for the economy, especially given the impact of recent events on domestic tourism more broadly.
Source: Australian Securities Exchange
Cracks in the House of Cards
Since mid-2017, Crown’s net profit after tax has only increased against the prior corresponding period on a single occasion.1 Naturally, much of this can be attributed to the highly volatile win rates in its VIP gambling operations, which have incurred significant disturbance ever since joint investigations relating to Crown’s junket operators across the Asia Pacific. Cascading shutdowns due to COVID-19 have only placed further strain on the group’s hotel and casino operations, which had historically provided somewhat of a safety net. The value of Crown Resorts is contingent now more than ever on future revenues, which may never eventuate even after the Australian market returns to normalcy. Yet how likely is it that Crown could lose its right to conduct gambling operations?
While the group’s outstanding tax bill seems like an infringement isolated from its other breaches; the commission found that it was in fact endemic to its compliance model. The state gambling tax shortfall totalled an estimated $480 million, driven by the use of illegal credit card facilities allowing patrons unauthorised access funds totalling $160 million.2 Complementing this was a raft of submissions detailing the use of gaming facilities to foster money laundering for organised crime, mirroring findings in New South Wales. Currently Crown is not licenced to operate in a gambling capacity at its Barangaroo One site in Sydney, and may very well lose its licences in Melbourne and Perth. Commissioner Ray Finkelstein, QC has indicated that while Crown will not be allowed to operate in Melbourne moving forward without significant oversight, the more effective approach may be to revoke its licence, forcing it to reapply under more stringent conditions.
The Road Ahead
Part of the criteria for a reinstatement of Crown’s licence would involve a change in its practices with a view towards the interests of the state of Victoria; it is under this test that the group is currently being scrutinised. Should Crown Melbourne be authorised to operate beyond the 18-month grace period, it will likely need to demerge from Crown Resorts in order to reflect its responsibility to Victorian economic and social interests. The Bergin inquiry commissioned in New South Wales found that Crown Sydney was not fit to operate by virtue of the group’s actions across Asia.3 Similarly, counsel assisting in the Victorian Royal Commission has suggested that the same logic applies, necessitating a division of the Melbourne Casino itself from the group more broadly. It is fitting that M&A activity is cited as a solution to Crown’s issues, given the partial sale of Crown to Melco Resorts triggered the investigations by the New South Wales Supreme Court.
Source: Australian Securities Exchange
The embattled Casino operator remains in possession of a potentially lucrative asset in Melbourne. A concerning debt profile and a narrowing window in which to fund the group’s ventures will likely subdue its value for some time. Yet the accretive value of its holdings may lure the more intrepid of investors looking to pounce on Crown Melbourne, an action which would be arguably more palatable to Victorian regulators than the status quo. While Star Entertainment has formally pulled its merger bid on the basis that it would not want to purchase Crown Resorts sans Melbourne, instead acquiring Melbourne Casino some years after a spinoff may be the best option for both parties. This of course leaves Crown Resorts with a significantly diminished revenue base, an albatross around its neck in Sydney, and a tarnished reputation. Yet that is likely already baked into the cake and may never be rectified.
Sam Triantafillopoulos is Director of Publications with the University Network of Investing and Trading, specialising in monetary policy and fixed income markets.
References
Crown Resorts Limited: https://www.crownresorts.com.au/Investors-Media/Financial-Results
Financial Review: https://www.afr.com/companies/games-and-wagering/crown-licence-cancellation-could-be-deferred-vic-royal-commission-20210725-p58coa
Victorian Government (Closing Submissions of Counsel Assisting the Commission): https://www.rccol.vic.gov.au/sites/default/files/2021-07/Closing%20submissions%20of%20Counsel%20Assisting%20the%20Commission%2C%20July%202021.pdf
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.
