Crown Resorts has fallen so low that private equity is the best option

Private equity firms usually have a reputation for buying “distressed assets” at bargain prices, taking as much money out of them while making them as profitable as possible, then selling them back at a huge profit.

But the takeover of disgraced Australian casino operator Crown Resorts by US private equity giant Blackstone Group could be the best option available to Crown shareholders, governments who benefit from gambling revenues and the community that suffers from the consequences of problem gambling.

Crown Resorts’ board has recommended Blackstone’s A$9 billion bid for total ownership, subject to approval by the Federal Foreign Investment Review Board and state gambling regulators. New South Wales, Victoria and Western Australia.

Crown’s astonishing ethical and moral depth in its pursuit of profit means that this is perhaps one of the few occasions where the financial and (especially) non-financial engineering of private equity leads to a positive net result for the community at large.

An atypical private equity operation

Private equity firms raise money from private investors to buy undervalued and often struggling companies to restore commercial health before exiting at a profit.

Private ownership can be advantageous for a struggling company because it removes the regulatory and other distractions that come with being a public, publicly traded company. This means that management can make decisions without worrying about short-term fluctuations in stock prices, for example.

The takeover of Crown Resorts by Blackstone is not a typical private equity transaction; Crown’s problems stemmed from moral, not financial, bankruptcy.

Despite the impact of the pandemic on casino profits – particularly the loss of high rollers overseas – Crown has always been profitable. But its licenses to continue reaping those profits are under a cloud.

A New South Wales Commission of Inquiry (headed by former New South Wales Supreme Court Justice Patricia Bergin) and a Victorian Royal Commission (headed by former Federal Court Justice , Ray Finkelstein) deemed Crown unfit to hold its Sydney and Melbourne casino licenses. A Western Australian Royal Commission on the company’s suitability to hold its Perth casino license is pending.

Illegal, dishonest, unethical, exploitative

The Victorian Royal Commission’s final report described Crown Melbourne’s management as disgraceful and its practices as variously illegal, dishonest, unethical and exploitative.

He lambasted top executives for being “indifferent to their ethical, moral and sometimes legal obligations”, and the board for failing in their primary responsibility to ensure the company “meets its legal and regulatory obligations. “.

Royal Commissioner Raymond Finkelstein during the Crown Resorts Melbourne Casino Inquiry on March 24, 2021.
James Ross/AAP

This included facilitating the laundering of millions of dollars and ignoring its problem gambling obligations. Its claim to have a “better approach to the world of problem gambling,” Finkelstein said, couldn’t “be further from the truth.”

Read more: Responsible gambling – a blatant lie behind which Crown Resorts and others can no longer hide

It is hard to imagine a more damning indictment.

Blackstone’s priority will therefore be to repair Crown’s many regulatory shortcomings and its deeply tarnished reputation, away from the gaze of shareholders, the media and investment banking analysts.

A rare opportunity

For Blackstone, Crown Resorts is a rare opportunity. Casino cash flow is irresistible to highly leveraged private equity investors. Casino company balance sheets dominated by valuable real estate assets are also an asset.

Blackstone has extensive experience in “returned” hotels and casinos.

For example, he acquired the Hilton hotel empire in 2007 and exited 11 years later, making a profit of $14 billion. Last year he sold The Cosmopolitan of Las Vegas for $5.65 billion, seven years after buying it for $1.8 billion. He is in the process of exiting his investment in Spanish gambling company CIRSA, which operates casinos and betting shops in Spain and Latin America.

Crown Resorts shareholders, meanwhile, are above a regulatory barrel.

The company’s license to operate its brand new Barangaroo casino is suspended. Its Victorian license is on probation, with the requirement that Packer reduce its 37% stake (through his company Consolidated Press Holdings) to 5%.

Read more: How Sydney’s Barangaroo Tower paved the way for a culture of dealing behind closed doors

Existing casino operators would have been reluctant to tarnish their reputation by buying into Crown, given its pending regulatory issues. Fixing its myriad problems can be expected to increase Crown’s costs (particularly compliance costs) and reduce its revenue (fewer high-roller junkets) – reducing its profitability and, therefore, the attraction of investors.

If Blackstone can oversee Crown’s rehabilitation of the regulatory pariah, it has the opportunity to profit from the ultimate corporate takeover story.

Crown Resorts new casino in Barangaroo, Sydney. All he needs now is a business license.
Dan Hombrechts/AAP

What happens next

Private equity firms help struggling companies by injecting the money needed to turn things around and by providing management expertise.

Crown doesn’t need the money, so Blackstone’s primary role will be to rehabilitate its brand and corporate credentials with regulators and, therefore, the investment community.

We can then expect, after a polite interval, to sell Crown either to a global casino operator via a commercial sale or to public investors via a bailout on the Australian Stock Exchange.

One of the criticisms often leveled at private equity firms such as Blackstone is that they aggressively (but legally) minimize their tax liabilities. In the case of a casino, tax liabilities should be more difficult to avoid because they are calculated on the basis of the income received rather than the profits declared. (That said, the Victorian Royal Commission found that Crown Resorts avoided $200 million in taxes, of which the company has since refunded $61.5 million).

But as long as Blackstone sticks to the rules, especially those around monitoring problem gambling, it’s possible it will serve the interests of shareholders while minimizing the social harm that casinos tend to inflict on the communities in which they operate.

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