The value of Crowns Melbourne assets would plummet by more than AU$2 billion if breaking them apart was required due to the company losing its Victorian casino license, according to Credit Suisse Australia.
Although they consider revocation of its license unlikely, analysts Larry Gandler and Bradley Beckett outlined in a note the consequences of facing such drastic action, which they believe would result in Crown Melbournes value falling from around AU$3.75 billion as a going concern to AU$1.72 billion as components.
Such drastic decline in value serves as a warning as to the consequences of a company putting its license at risk, with Counsel Assisting a Royal Commission into Crown Melbournes suitability having last month asked for a finding that Crown is unsuitable on public interest grounds. Commissioner Ray Finkelstein is due to hand down his report by 15 October.
Credit Suisse this week valued a broken apart Crown after Finkelstein on Tuesday told Crowns lawyers he had already looked into how Crown Melbournes assets might be broken up should casino operations be handed to another company. He also suggested that both the casino and the main Crown Towers hotel could be forcibly sub-leased while other hotel assets remain under Crowns control.
Noting that the casino, hotel, parking and retail outlets currently sit on crown (government) land, for which Crown pays AU$1 per year to rent, Gandler and Beckett believe Crown does not have the right to sublet and, should it lose its casino license, any new licensee would simply move in as a new tenant.
As far as we understand, if Crowns casino licence is cancelled and a new casino licensee is installed, Crown must vacate the premises and the new licensee becomes the lessee, they write.
In that case, we can only imagine that Crown would be able to sell the chattels (things Crown can remove) with the new lessee unlikely to pay for fixtures, fittings and buildings. This sounds quite drastic, but likely to transpire in such a scenario, in our view.
Credit Suisse values other key businesses connected to the site, namely the Crown Metropol and Crown Promenade hotels, at AU$461 million and AU$233 respectively. Crown also owns a conference center, some retail, a 5,000 square meter block of land and a car park that are all freehold.
The companys database, IT systems and intellectual property are estimated at AU$250 million and chattels at a combined AU$112 million, according to Credit Suisse.
Without Crown Melbourne, the analysts see Crowns share price falling to AU$7.50 from a current target price of AU$10.10 (actual price at close on Thursday was AU$8.74, down from a 2021 high of AU$13.15 in May).
There is scope, the analysts say, for Crown to keep its casino licenses in both NSW and Western Australia even if it does lose its Victorian license due to the different regulatory frameworks in each state, and NSW has already given Crown a template for achieving suitability after being found unsuitable to operate Crown Sydney following release of that states Bergin Report in February.
But Gandler and Beckkett believe even losing the Crown Melbourne license remains unlikely.
This is not our base case. We assume Crown Resorts retains its Melbourne casino licence under supervision, they said.
This is not a political statement but rather a financial one: We think the Victorian Government may offer a path for redemption that is, amending the Casino Control Act to allow Crown Resorts to transition from unsuitable to suitable.
It seems to us emotionally illogical to consider that the Victorian State Government may not to offer a path to redemption even though Crown has invested over AU$2.1 billion in capex yielding an average ROI since 2005 (the period for which we have data), maintained an iconic venue that is the most visited casino in Australia by tourists, has contributed AU$10 million per annum to charities and has operated the only private gaming university that has trained hundreds of casino managers throughout Asia Pacific.
This is not to say whether Crown did or did not contravene the Casino Control Act. It simply says there is a political rationale for allowing Crown to retain its licence.
The Victorian State Government may consider that there is no guarantee that a new casino licensee will be as engaged with the community as Crown especially since under tighter regulations there will be reduced cash flow to support investment over the long term.