Casinos operator Echo Entertainment Group will seek to raise $454 million via the issue of new shares as it deals with an expected fall in earnings of up to 39 per cent.
Echo expects to report earnings of between $270 million and $315 million for the year to June 30 – down from $446 million in the previous financial year.
Trading conditions had remained difficult in the second half of the 2012 financial year, with revenues negatively affected by soft consumer sentiment and volatility in revenue generated by the VIP gambler business.
The range in expected earnings is due to the potential range of win rates against high-rolling gamblers.
Echo on Friday said it would raise funds through the issue one new share for every five already held by shareholders, at $3.30 per new share.
Shares in Echo are in a trading halt, which will be lifted on Monday. The shares last traded at $4.49.
Echo said the funds raised would be used to reduce debt and strengthen its balance sheet, thereby providing a capital structure that would support the company’s VIP rebate business, which supports regular, high-rolling gamblers.
“The entitlement offer announced today will reduce gearing, help ensure a more appropriate capital structure and maintain financial flexibility for the company,” Echo chief executive Larry Mullin said.
Echo said its major shareholder, rival casino operator Crown, would take up its full entitlement offer, but Crown’s stake in Echo would remain at 10 per cent.
Echo also said it was in talks with its lenders to modify the terms of its loans to ensure they are maintained.
In May, Echo said it would book a writedown of $29.9 million in its full year accounts associated with its international high-rollers business.
One of Echo’s partners in attracting VIP players, SilkStar Global Marketing, had been placed in liquidation in March and had not repaid $7 million that Echo had provided in development fees and prepaid commissions.
Fat Prophets analyst Greg Fraser said the capital raising comes at a time when the domestic consumer environment is weak and Echo has already spent a large amount of money upgrading its Sydney casino, The Star, and intends to refurbish its Queensland casinos.
“You could argue that their timing has been a little unfortunate, and they’re not going to very quickly see any strong return on that investment,” Mr Fraser said.
Echo’s experience with SilkStar suggested that Echo had either not been very good at managing its VIP business or that it was struggling to make any great headway into the lucrative high-rollers market in Asia, he said.
Mr Fraser said The Star casino had potential and Echo needed some help in managing its VIP business.
Whether Crown might be able to convince the Echo board and management to do things in a better way remained to be seen.
“The Echo people will understandably be wary of Crown’s intentions and won’t want to be seen to be yielding to their influence because that would be perceived as Crown having control of Echo for just 10 per cent of the equity,” Mr Fraser said.
