Wake-up call
Prospects in South America have shaken the share price into new life
un International’s nightmare run on the JSE has finally ended with a sweet Dreams deal. The SA gaming and leisure giant has got the green light to merge casino interests into those of the Latin American operator.
Sun’s share had slid by more than 40% from a high of R122 in mid-July last year to under R70 in late May this year. But confirmation last week of a deal to secure its international presence has moved the share from R68.86 in midMay to over R80 at the time of writing.
The Financial Mail reckons the share offers solid longer-term value, even at the perked-up levels.
Recent results from Tsogo Sun, SA’s biggest gaming business, add fundamental support with indications that activity at casinos has picked up encouragingly in the past few months.
Sentiment for the company turned brittle in the second half of 2015 when it became clear spending in the local gaming sector was tightening up considerably.
Then there was the matter of two key corporate actions going
Sawry. Arguably that was what really spooked the market. First, efforts by Sun and its rival Tsogo Sun to diplomatically carve up the contentious Cape Town casino market were stymied. Competition authorities delayed a decision on the deal for so long that the terms no longer made economic sense.
Second, Sun’s attempt to take over its rival Peermont, which owns the Emperors casino in Kempton Park, also fell foul of competition authorities and was called off. To make matters worse, this triggered a R675m “breaking fee” payment from Sun to Peermont — effectively compensation for the latter having to square up to increased competition from the former’s planned R4bn Menlyn casino.
Sentiment for Sun, however, swung up sharply last week after its plans to merge its Latin American casinos with Dreams were approved. The enlarged Dreams, which includes operations in Chile, Panama and Colombia as well as plans to expand into Brazil and Mexico, will be the largest casino operator in Latin America.
The Dreams portfolio of six casinos in Chile (Iquique, Temuco, Valdivia, Puerto Varas, Coyhaique, Punta Arenas) and four in Lima, Peru will be comple- mented by Sun’s Monticello casino in Chile, the Ocean Club Casino in Panama and the Sun Nao Casino in Colombia.
The sheer mass and bigger balance sheet should allow Dreams to make substantial acquisitions and take on larger projects throughout Latin America. The opening of the casino market in Brazil should be a test for Dreams as there is no doubt that larger, international casino groups will contest this lucrative new market. Sun CEO Graeme Stephens hints that Dreams may not seek out the flagship developments in the biggest centres in Brazil, but look instead for opportunities on the periphery that won’t stress the balance sheet. 14,000 13,000 Aside from Brazil, Dreams could bid for additional licences in Chile when existing licences come up for renewal in the next 12-18 months. It seems the new-look Dreams will have some room to move and shake. Stephens notes that the debt in Dreams has been restructured, giving the business sufficient capacity to fund its expansion plans. “We raised the debt from a combination of Chilean banks, comprising BCI, BBVA, Santander and Itau-Corpbanca. This is a huge vote of confidence in our ability to consolidate, grow and expand into the region.” Another key development to watch is whether Sun will look to increase its stake in Dreams next year. The company has a pre-emptive