The Star Entertainment rocked up to Crown Resorts with the swagger of a high roller but is playing with a short stack. The Australian casino operator’s proposal to merge with its larger rival was glitzy enough to elicit mild interest, unlike the dubiously spurned A$8.4 billion ($6.5 billion) takeover bid from Blackstone. Star’s offer is less than it’s cracked up to be, however, and there’s little apparent room to improve it.
After keeping its deal cards closely guarded, Crown responded to Star’s entreaty by asking for more information. It simultaneously told buyout shop Blackstone that its A$12.35-a-share cash offer both undervalued the company and was too risky from a regulatory perspective. It’s a hard rejection to parse. If the regulatory hurdles are too high, then price is irrelevant.
There’s also some bluffing from Star. It touts a value of more than A$14 a share but the stock swap is worth considerably less; just A$10.85 a share today compared to the A$12.12 where Crown was trading before the offer was made. Although Star is willing to pay A$12.50 cash for up to a quarter of the equity, it will be relying on its target’s balance sheet for that funding because of its own hefty debt load.
To raise the stakes, Star is pitching annual cost savings of between A$150 million and A$200 million. Capitalising them using the company’s aggressive assumptions only lifts the theoretical value to Crown investors, who would own 59% of the enlarged entity under the hybrid cash-and-stock proposal, to around A$13 apiece, according to Breakingviews calculations. Star’s own shares indicate doubts about the synergies: They are barely 4% higher than before its unsolicited offer.
Crown’s stock is underpinned by an expectation that Blackstone will sweeten its bid again. Based on the brushoff, it might have to offer a break fee to demonstrate its justifiable confidence that Australian gaming regulators will deem it a suitable owner. At this stage, it might be better to wait to see if approval comes through. Star has thrown in its limited pile of chips while a well-bankrolled Blackstone may yet improve its hand.