James Packer’s exit from Echo Entertainment is a signal the Crown boss no longer sees the rival casino company as a threat to his plan for a luxury Sydney gambling resort.
Echo shares plunged 11.9 per cent to a record low of $3.03 on Friday after Crown confirmed it had sold its 10 per cent stake.
Crown dumped the 82.6 million shares on Thursday night at $3.20 a share, a discount to Thursday’s $3.44 close.
Little explanation was given for the exit, which came just two weeks after Crown received regulatory approval to increase its Echo holding to 23 per cent.
In a statement, Crown said its board had determined that the company should pursue its Sydney development “without speculation surrounding its Echo shareholding”.
Mr Packer described his controversial proposal, which is competing with a rival plan from Echo, as “a once in a lifetime project”.
Crown’s stake in Echo was seen as a key defensive position in its highly publicised campaign to establish a VIP casino in Sydney at the new Barangaroo harbourside development site.
Echo owns The Star casino, holder of Sydney’s sole casino licence.
Nomura gaming analyst Nick Berry, who placed a reduce recommendation on Echo following Crown’s move, said Mr Packer’s exit from Echo could be read as a sign Crown expected to succeed in its Barangaroo bid.
While other possibilities have been canvassed – among them that Crown was concerned about a possible equity raising by Echo to fund growth plans, or that Crown’s stake was a diversionary tactic while it staked out its Barangaroo plan, Mr Berry said confidence in getting approval for the Sydney option was the most likely reason.
“Often the simplest answer is the right one,” he said.
Mr Berry wrote in a note to clients that Genting seemed an unlikely bidder for Echo, given that the Malaysian firm had sat on its five per cent stake since last year.
“From the outset of Crown appearing on Echo’s register, we remained sceptical that Crown would look to bid,” Mr Berry said, citing Echo’s poor return on invested capital in comparison with Crown’s, and the challenges involved in lifting that return.
“The same challenge applies to any other potential acquirer, and for this reason we think Genting HK is unlikely to look to acquire Echo,” he said.
After predicting that Crown’s exit would spark a fall in Echo shares on Friday, Mr Berry said an exit by Genting would see the stock fall further.
“Genting would have to do an institutional bookbuild to exit the stock and it would be at a discount to the market,” he said.
Mr Berry said Echo’s assets and low share price would make it attractive but there was execution risk involved in building value in the company.
“At current trading levels there is value in the stock, it’s just a question of what is it going to take to unlock that value,” he said.
The NSW government is expected to make a decision on the casino proposals after June 21, the deadline for the Crown and Echo plans to be finalised.
