Crown Resorts (CWLDY) shares won big on the ASX today, with the stock soaring 21.4% in Sydney trade. That's after the troubled casino operator on Monday said it had received an A$8.0 billion (US$5.4 billion) buyout bid from the world's largest private-equity investor, the Blackstone Group (BX) .
The offer from Blackstone, which already owns 9.99% of the company, comes at A$11.85 in cash per share. It's a 19% premium on the volume-weighted average price of the shares as they have traded since the company reported half-year results. Crown shares closed at A$11.97 on Monday, so it's clear investors think the deal will go ahead.
Crown has been on a streak of bad beats, and took a crushing loss in mid-February. Its preparations to open its new casino in Sydney were thrown into chaos after former judge Patricia Bergin released a report finding that Crown is "unsuitable" to hold a gambling license. Crown has already built the casino and the hotel above it, as part of the 75-floor Crown Sydney skyscraper, now the tallest building in the city. The hotel and restaurants are open. The casino remains blocked off.
I noted at the time that the share-price movement did not look like the price of a casino operator that has just been told it is not fit to operate casinos. On the face of it, the report was an utter disaster. Yet the stock ended the day of its publication with only a 3.4% decline. The shares have held pretty steady since last May, their post-Covid recovery point, even though it was clear from the very public grilling of Crown executives that the licensing inquiry was not going well.
Blackstone and other investors are clearly now betting on a recovery, and more than likely a change in management for Crown. Australia's largest gambling company was founded by James Packer, heir to the larger-than-life media tycoon Kerry Packer. James Packer, who hit U.S. headlines in 2016 when he briefly got engaged to the singer Mariah Carey, now has his exit strategy.
Packer has been looking to sell down or offload his 36.8% stake. He resigned from the board of Crown in March 2018, citing mental health issues. After the Sydney licensing inquiry was released on February 10, three Packer-nominated board members also resigned, leaving Packer without representation on the company's board.
Packer said during licensing questioning in October last year that he has bipolar disorder, and blamed his "medical state" for sending "shameful" and "disgraceful" threatening emails to a banker for failing to support his plans to take Crown private.
That was just one of the many embarrassing disclosures that came to light during the hearings for the inquiry. It concluded Crown had been "facilitating money laundering" and pursuing commercial relationships "with individuals with connections to Triads and organized crime groups."
Packer also said that a "failure in compliance" led the company to set up offices to recruit Chinese big-money gamblers from a residential property in Guangzhou, in mainland China, where it is illegal to solicit gambling. Those troubles came to a head in 2016 when 16 of its employees were jailed in China for searching out such "whales".
Although the bid for Crown comes unsolicited, Blackstone has been sniffing around the company for a while. It acquired a 9.99% block of shares in April 2020 that Macau casino operator Lawrence Ho - a former joint-venture partner of Crown - had acquired through Ho's casino company, Melco.
Blackstone paid A$8.15 for those shares, a real bargain at a 37.3% discount to the A$13 price that Melco paid. The private-equity group displayed virtually optimal timing. Crown shares had just plummeted 51.1% thanks to the coronavirus, which forced pretty much all casinos to close, and continues to rob them of traveling punters.
Ho had been looking to buy two 9.99% chunks of the company, which would have taken his stake to the 19.9% limit just below the level where he'd have to make a bid for the whole company. Aussie gambling regulators were already grumbling about Ho's involvement, so he didn't go ahead with the second investment, and sold the first block to Blackstone, claiming the coronavirus had encouraged him to focus on the Macau market.
That was a bit of a fudge. Australian regulators had noted that Lawrence Ho's father, Stanley Ho, held a small stake in his son's company via another company that was banned from doing business in Australia. The one bright spot of the report was that it concluded Lawrence Ho's purchase of the original 9.99% stake did not breach regulations. But it was the failure to tell New South Wales gambling regulators about the Ho share sale that trigged the licensing review.
Stanley, who has since died, held a 40-year monopoly on gambling rights in Macau, where triad gangsters run many of the high-stakes private rooms and the "junket" business that brings whales to town. It has also been popular for gamblers to give mainland junket operators Chinese yuan and then collect chips in Macau that are denominated in Hong Kong dollars, effectively laundering your currency out of China's walled-off financial markets, a practice Beijing is trying to stamp out.
Those alleged triad ties to the Ho family resulted in Lawrence Ho's sister Pansy having to surrender the MGM Mirage license she had been granted in New Jersey. The Crown application in Sydney faltered first and foremost because of the company's Macau links, and the joint venture in Macau between Lawrence Ho's Melco and James Packer's Crown.
Packer and Ho first joined forces in Macau in 2004, creating Melco Crown Entertainment and opening several successful casinos. But Packer soured on Macau after the jailing of his employees in China. Ho's Melco International Development (HK:0200) bought out Crown and renamed the Nasdaq-listed subsidiary Melco Resorts & Entertainment (MLCO) .
After the New South Wales licensing review concluded Crown is not fit to hold a license, the gambling authorities in Perth and Melbourne, where Crown already operates casinos, have launched their own inquiries.
You'd bet your hat that Blackstone has found another opportune time to buy further into Crown. Wynn Resorts (WYNN) was in talks to buy Crown out in 2019 at a price of around A$14.75 per share, but bailed when the discussions became public.
The Crown board would still need to accept the deal unanimously. It issued a statement that it "has not yet formed a view" on the merits of the deal. Blackstone has also written in a binding implementation agreement that would include a condition that Crown have regulatory confirmation that a Blackstone-owned Crown can be considered suitable to operate casinos in Sydney, Melbourne and Perth.