Why Sun wants Peermont
GAMING: DESPITE THE DEBT, EMPERORS PALACE LITERALLY PRINTS MONEY
➳ What makes deal so lucrative is that it will give firm a major operation in Gauteng.
To be clear, Sun International is paying R3.2 billion in cash to buy the Peermont Group for Emperors Palace and Emperors Palace alone. Sure, there’s the R4 billion in debt that it will assume as part of the transaction, but within two to three years of the transaction closing, it will resume its dividend payout ratio of 75%.
There are some murmurs about competition authorities poo-pooing the deal, but the gambling – sorry, “gaming” – market is significantly larger these days with the proliferation of sports betting operators such as Betway and Hollywoodbets (the two largest in South Africa). Expect this argument to be put forward by both parties (Peermont is a willing seller – its debt burden remains stubbornly high).
What, then, is so attractive about Emperors?
Well, it gives Sun International a major operation in the lucrative Gauteng market. Coincidentally, this deal will divide the largest provincial market in the country exactly in half along the N1/M1 highway.
Sun International will own Time Square, Carnival City and Emperors Palace to the east. Tsogo owns Montecasino, Silverstar and Gold Reef City to the west, with its newly acquired Emerald Resort on the Vaal River being the exception (only because the N1 veers westward).
Just how “major” was made clear on Monday following the release of the transaction circular to Sun International shareholders.
In the first six months of last year, Emperors Palace generated R1.06 billion in income from gaming (net gaming win; that is its portion of bets), food and beverage, rental, as well as rooms revenue. The casino is, rather unsurprisingly, responsible for the bulk – 84% – of this.
On this R1.1 billion in income, it reported earnings before interest, tax, depreciation and amortisation (Ebitda) of a staggering R461.5 million. This equates to an Ebitda margin of 43%.
Given that details have been scant following Peermont’s delisting in a private equity buyout in 2007, the two most lucrative casinos in the country have been Montecasino and GrandWest.
The former is in a prime position in Fourways, Johannesburg, while the latter has a monopoly in Cape Town. The Western Cape government has been making painfully unhurried progress on licensing a second operator in the city.
Tsogo Sun, Montecasino’s owner, has since 2019 no longer disclosed the specific performance of that property. It lumps its casinos into regions, meaning that Gauteng includes Montecasino, Gold Reef City, Silverstar and (more recently) Emerald.
We do, however, have historical data which allows us to infer that Montecasino is roughly around 55% of income and more than 60% of Ebitda in Gauteng.
In the 12 months to September, Montecasino is likely to have generated R2.5 billion in income. In its most recent annual report, Tsogo discloses the Ebitda margin for Montecasino (38.8%), but it is almost certain this is higher now following the return to normal trading conditions post-Covid.
At an Ebitda margin of about 40%, Montecasino will generate Ebitda of R1 billion. This is a massive business, and a massively profitable one.
GrandWest is similarly impressive (albeit with a lower margin). In the 12 months to June, it reported income of R1.8 billion and Ebitda of R638 million.
Emperors Palace is firmly in second place nationwide. Extrapolating out trading for the 12 months to June shows income of around R2.1 billion and Ebitda of just over R900 million.
Sun International’s great hope in this market, Time Square, generated income of R1.5 billion in the 12 months to June, with Eibtda of nearly R600 million.