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Morningstar | It Was Over Before It Began, Wynn Ends Takeover Talks with Crown. See Updated Analyst Note from 10 Apr 2019

In a surprising turn of events, Wynn Resorts has terminated all discussions with narrow-moat-rated Crown Resorts concerning a potential takeover, only a day after Crown released the news to the Australian market. Wynn cited the "premature disclosure of preliminary discussions" as the reason. Despite this being a disappointing outcome for Crown shareholders, we believe there are some positive takeaways. We view Wynn’s interest in Crown is an indication the group is in play and vindicates our positive outlook on Crown and potential upside to the current share price. While we prefer not to speculate on Crown’s next step from here, it appears the Board is willing entertain any proposal at the right price. It wouldn’t be a surprise to see another bid to emerge in the future, from either Wynn or potentially other interested parties. These scenarios could be why Crown’s share price has retained over half of the premium gained on the back of the initial takeover news.

Despite dropping by 9% on the day of Wynn’s withdrawal, Crown shares are still undervalued relative to our unchanged AUD 15.00 per share fair value estimate, albeit now 3-star-rated. A takeover or not, we are still confident in Crown’s long-term outlook. Despite enduring a couple of challenging years, we remain positive on the outlook for Australian gaming, particularly the VIP market. Strong inbound tourism from China has been a major tailwind for Crown and should remain so for the next decade. Despite slowing Chinese economic growth, the growing middle class and shift towards consumption from investment are supportive of this tourism tailwind. Crown is well placed to leverage this trend with luxury facilities in Australia’s most attractive tourist destinations and major east coast cities, Melbourne, and from fiscal 2022, Sydney. In addition to growing the local VIP market, we forecast Crown to take a meaningful share of Star Sydney’s VIP customers.

Additionally, Crown’s pristine balance sheet is likely a key attraction. After exiting Macau and Las Vegas, the company has a net cash position of almost AUD 200 million as at December 2018. Based on our projections, net debt is likely to reach around 1 times EBITDA within the next three years as Sydney capital expenditure nears completion. Post the Sydney project, the firm will be highly cash-generative and debt levels are likely to decline materially.