All bets are off
Looking at the ratings on the JSE’s heavyweight casino stocks, the market appears a little more inclined to bet on Sun International than rival Tsogo Sun after the companies failed to reshuffle interests in the lucrative Western Cape casino market.
Early last year, proposals were tabled for Sun to sell a 40% stake in the GrandWest and Worcester casinos to Tsogo for R2,1bn. The deal was called off last week with the parties suggesting that approval — held up at competition tribunal level — would simply take too long, throwing out the originally envisaged benefits of the transaction.
Sun would have hoped that the arrangement, by ensuring Tsogo owned a chunk of Goodwood-based GrandWest, would dissuade its rival from grabbing the much-mooted second casino licence in Cape Town.
Tsogo, which dominates the Gauteng market and operates the massive SunCoast casino in Durban, would have relished the chance to get a bigger slice of the Western Cape casino market.
There’s still no official word on the second casino for Cape Town, but the idea is that an existing Western Cape licence would be allowed to transfer to Cape Town.
If a second casino is allowed in Cape Town — presumably located in an area more central than Goodwood — then Tsogo, which owns three of the provincial casinos (Mykonos, Caledon and the Garden Route), will be the hot favourite to transfer one of its existing licences.
Of course, there could be questions around the appetite at Tsogo (or Sun with Worcester, for that matter) to uproot an existing operation and invest heavily in a new property when the local casino market looks distinctly ex-growth.
There is also the prickly matter of gambling spend increasingly being diverted by alternative gaming like limited payout machines, electronic bingo and sports betting.
Judging by share price movements, the market might have preferred Tsogo to have snagged a slice of cash-spinning GrandWest rather than potentially having to mull the cost of building a new casino.
But one industry source reckons the decision to call off the proposed arrangement at GrandWest and Worcester probably suits Tsogo CE Marcel von Aulock far better than Sun CE Graeme Stephens.
There is a sense Tsogo is, these days, more staid than a deal-spinning Sun. Rather than grand expansionary endeavours, Von Aulock has largely been reinvesting heavily in Tsogo’s existing properties.
More recently Von Aulock hinted that Tsogo could unbundle and separately list its sprawling property portfolio on the JSE, but this development may reinforce notions that the company is focusing on extracting value from existing assets.
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Stephens, on the other hand, looks a little more stretched, having recently advanced on unlisted rival Peermont (which owns the Emperors Palace casino as well as other, smaller properties) and accelerating the company’s push into the Latin American casino market.
There’s no doubt the more than R2bn earned from the sale of the stakes in GrandWest and Worcester would have considerably reinforced the Sun balance sheet.
There are plans for a significant rights issue attached to the Peermont deal. But it’s worth remembering that Peermont, which reported revenues of R3,25bn and earnings before interest, tax, depreciation and amortisation of R1,2bn, will enhance margins and cash flows for Sun.
In any event, the possible restructuring of Sun’s enlarged SA casino portfolio could produce substantial proceeds, assuming smaller casinos may be sold off individually or as a combined entity.
Presuming the Peermont deal gets a thumbs-up from competition authorities and Sun quickly finds traction in Latin America (noting that some industry insiders believe these markets bring their own set of challenges), would there be any chance that proposals to divvy up the GrandWest and Worcester casinos are revisited?
Sun spokesman Michael Farr says all parties remain open to a new deal, “which would be on different terms, given the change over time in the commercial metrics”.
The terms of a revised arrangement might be very different from what was proposed early last year, depending on how two very different company strategies play out.