Australia's largest gambling company, Crown Resorts, is facing a crisis of its own making after a damning report that finds it unfit to open its newest casino.
Crown has already opened the doors to the nice-and-shiny, 75-floor Crown Sydney skyscraper, which is now Sydney's tallest building. The hotel and restaurants are open for customers. But the gambling floor is likely to remain walled off for a while.
That's because former judge Patricia Bergin released her findings that the company is "unsuitable" to hold a gambling license. A casino license applicant with "Crown's stark realities of facilitating money laundering, exposing staff to the risk of detention in a foreign jurisdiction and pursuing commercial relationships with individuals with connections to Triads and organized crime groups would not be confident of a positive outcome," Bergin wrote.
Bergin's report could be a disaster for Crown. If Crown is deemed unfit to hold a gambling license in Sydney and surrounding New South Wales, it's hard to imagine how it's in good standing in Melbourne and Perth, where it already operates casinos. And politicians are starting to ask exactly those questions.
"If they are, as has been found, unfit to hold a license in Sydney, surely they are just as unfit to hold a license in other jurisdictions," said Andrew Wilkie, a member of parliament who campaigns against gambling, according to a report from Reuters.
Yet the stock has not been battered. Crown shares plunged 8.9% at the open on Wednesday but immediately recovered much of that ground, ending with a 3.4% loss. The shares generally have held their ground since last summer despite public hearings during the Bergin inquiry that raised serious questions about Crown's management practices.
The price movement suggests investors do not expect the Bergin findings to color the whole company. Crown probably will move to reshuffle its executive ranks. Its largest shareholder, James Packer, is likely to intensify his efforts to sell down his 35.9% ownership stake, perhaps to a Las Vegas company.
Crown on Tuesday had requested a halt in trading of its shares until Thursday or when the Bergin report came out. But because that report was released on Tuesday afternoon, trading resumed here on Wednesday. A hefty 5.3 million shares changed hands. Selling may intensify Thursday.
Crown stems out of the empire of James Packer's father, Kerry Packer, who lived large literally and in the public imagination. Kerry was a big gambler himself, on the tables and in corporate terms. The story has it that a Texas oil tycoon once bragged he had a US$60 million fortune while trying to get Kerry to play him in poker. Kerry supposedly pulled out a coin and said "I'll toss you for it!" Malcom Turnbull, who went on to became Australian prime minister, says Kerry Packer threatened to have him killed when they fell out during a business dispute.
Kerry's son James now heads the Crown empire. With a net worth of $3.6 billion, he's Australia's ninth-richest person, according to Forbes. But he has stepped back from executive oversight and may now even look to exit the company. Packer's lieutenants on the Crown board, Guy Jalland and Michael Johnston, resigned from it Wednesday, leaving Packer without representation on it.
Crown shares fell by 50% when the pandemic hit, with casinos bereft of foreign gamblers and contending with local lockdowns. But most of those losses had been recovered by Crown by mid-2020. The shares are one-third the price of their highs set in August 2018, but do not show the weakness you might expect of a casino operator that has been told it is not fit to run casinos.
The New South Wales gambling regulator will meet later this month to discuss the Bergin report and rule on whether Crown receives a Sydney license. It seems a foregone conclusion that the license will be denied.
Crown has not been successful in its efforts to expand overseas, although it did start a successful joint venture in Macau. The ramifications of that partnership in the former Portuguese territory are still being felt.
Crown has tried on several occasions to enter the Las Vegas casino market, most recently buying a plot of land in 2014 that it hoped to turn into the 1,100-room Alon Las Vegas casino. But it never got a shovel in the ground and sold the plot in 2018 to Wynn Resorts (WYNN) .
Crown in 2016 ran into trouble in mainland China, where 16 of its employees were jailed for searching out whales, or high rollers, to come and play in the company's casinos. It's illegal to solicit people for gambling in China, where only Macau is allowed to operate casinos. Partly as a result of its troubles in China, Crown decided to focus on its operations in Australia.
James Packer and Lawrence Ho, himself the heir to a gambling fortune, formed a joint venture in 2004 to operate casinos in Macau, with the two scions as co-chairmen. But despite helping build three highly profitable casino resorts in Macau, Crown sold out of its holdings for US$1.2 billion in 2017.
It is Packer's close ties with Ho that lead to the reference to Crown's business dealings with entities linked to Chinese triad gangsters. Lawrence Ho's father, Stanley Ho, for 40 years held a gambling monopoly in Macau, where underworld links to the gambling industry were and are rife. The territory's image has improved since the monopoly was broken in 2002 and Las Vegas operators came in. But even the Vegas companies have faced accusations that it is triads who operate their junket operations and the back-room private high-stakes rooms.
U.S. gambling regulators have ruled that Stanley Ho and his daughter Pansy Ho have links to Chinese organized crime. That forced MGM Mirage (MGM) , which has a joint venture with Pansy Ho in Macau, to give up its license in New Jersey.
Packer in May 2019 agreed to sell 19.9% of his ownership stake in Crown Resorts to Lawrence Ho for AS$1.76 billion. That would have brought Packer's former Macau partner to the ownership limit allowed in Australia before a minority shareholder must make a bid for the whole company. Lawrence Ho said publicly he would be interested in enlarging his interest.
However, Australian gambling regulators balked at the involvement of Lawrence Ho, precipitating the review by the New South Wales gambling regulator that has just concluded. They noted that father Stanley, who subsequently died, held a stake in his son's company via a company that was banned from doing business in Australia.
In February 2020, Lawrence Ho put on hold his purchase of the Crown shares, which was due to take place in two tranches. The second sale of a 9.99% holding did not go ahead, and Melco sold its original 9.99% block to Blackstone Group (BX) at a 37.3% discount to the price it paid. Ho said he wanted to focus on the Macau market due to financial concerns stemming from the coronavirus.
James Packer, who stepped down as executive chairman of the Crown board in 2019, citing his mental health, still wants to sell down his holdings. Prior discussions with Wynn over his entire 36% stake were scrapped when they became public knowledge.
The company now looks set to continue without Packer's involvement, and potentially without his ownership if he sells a sizable chunk of shares. It may be his removal that finally results in revisiting the issue of the license for the casino in Sydney and determines the future of the company.