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Morningstar | Crown and Wynn Resorts Enter Takeover Discussions, a Pleasing Outcome for Patient Shareholders

Narrow-moat-rated Crown Resorts confirmed media reports of a takeover proposal from Wynn Resorts, a U.S.-based casino operator with properties in Las Vegas and Macau. This takeover is an acknowledgement of what we had previously considered a meaningfully undervalued stock. While the details are limited, the (preliminary, confidential, non-binding and indicative) proposal would see Crown acquired by Wynn for a combination of 50% cash and 50% Wynn shares, with an implied value of AUD 14.75 per share. The implied price represents a negligible 2% discount to our AUD 15.00 per share fair value estimate. This is a positive outcome for Crown’s shareholders who have endured several challenges including: (1) the arrest of several Crown employees for promoting gambling in mainland China; (2) the consequential drop-off in VIP turnover across Australia; (3) the withdrawal from Macau and Las Vegas; and (4) James Packer’s departure from the board of directors, just to name a few. After rising by around 20% on the day of the takeover announcement, shares in Crown Resorts trade at a modest 5% discount to our fair value, albeit comfortably within 3-star territory.

The market was concerned about the outlook for VIP following recent volatility and was consequently underappreciating the earnings upside from the Sydney casino which represents around 20% of our valuation. We continue to forecast significant growth in Australia’s share of the global VIP market, which is currently estimated at the low- to mid-single-digit percentage range, despite rapidly increasing during the past decade. We expect the new Sydney casino to attract players to the region, and we forecast Australia’s share to increase by around 200 basis points to approximately 6% over the long run. In addition to growing the local VIP market, we forecast Crown to take a meaningful share of Star Sydney’s VIP customers, supported by a superior location, high-end focus, and brand-new facilities.

The proposal is subject to several conditions including due diligence, regulatory approval, and recommendation by the Crown Board. Management said the board has not yet considered the most recent proposal from Wynn, which gives the impression this is not the first attempt. The discussions between Crown and Wynn are still in the preliminary stages and no agreement has been reached regarding the structure, value or terms of the transaction. In our opinion the Australian Competition and Consumer Commission are unlikely to have any major concerns with the change in ownership. Additionally, we don’t envisage gaming regulatory bodies or state governments objecting to Wynn, a highly reputable, global casino operator.

At this point, it is unclear how Wynn Resorts will finance the AUD 10 billion acquisition. Although given their current financial position, our initial assumption would be a combination of debt and equity. Crown’s balance sheet is in pristine condition, and we forecast net debt/EBITDA to peak at 1 during fiscal 2020, despite the AUD 2 billion Sydney project. Post the Sydney project, the firm will be highly cash-generative and could support considerably higher debt levels. Crown’s financial health could be a key factor in Wynn’s rationale for the takeover.