acker owns 36.4 % of the Nasdaq-listed Melco Crown Entertainment (MPEL) business, which owns the City of Dreams casino, and together with other shareholders has shovelled in up to us$ 3.5 billion in licence, construction and fitouts, as part of a grand plan to have stakes in casinos across Europe, the US, Asia and Australia.
Unfortunately, most of Packer's international forays are turning into a money pit, with fund managers and analysts ascribing zero value to most of the international businesses. But the biggest question mark is over his MPEL venture in Macau. MPEL's second-quarter results released yesterday revealed a 49 % slump in net revenue to us$ 215 million, from us$ 384 million in the previous corresponding period.
Worse still, it suffered a massive blowout in losses to us$ 78.5 million compared with a previous loss of us$ 1.7 million. While many argue that the Macau investments will start to make some good returns in 2012, given it only opened two months ago, it is shaping up to be later rather than sooner.
The Weekend Australian can reveal that its sub-concession, or licence, to operate casinos in Macau expires in 2022 and everything, including the us$ 2.5 billion development costs, the building and gaming equipment, can revert to the Macau government without compensation. This bombshell paragraph is buried on page 33 of Melco Crown's prospectus dated December 19, 2006.
The prospectus says: "On the expiration date of MPBL Gaming's sub-concession, unless MPBL Gaming's sub-concession were extended, the portion of casino premises within our developments to be designated with the approval of the Macau government, including all gaming equipment, would automatically revert to the Macau government without compensation to us."
Wilson HTM analyst Andrew Hills said that given the existence of this clause, it would make it difficult for MPEL to secure an extension to its existing sub-concession without having to stump up another significant fee to the Macau government in 2022.
"The Macau government is unlikely to take back the premises and equipment and become a casino operator but the MPEL disclosure document clearly says that if its sub-concession is not extended, all casino assets automatically revert to the Macau government," he said. "This means it can use this to charge another fee to roll it over."
MPEL paid the Macau government an estimated us$ 900 million for its casino licence. The potential loss of a licence in 2022 or the prospect of another fee should not come as a shock in the rough and tumble of the gambling world.
Globally, tougher regulation is costing businesses money, and in Australia, listed stocks including Tabcorp, Tattersall's and Crown are witnessing regulatory changes, tougher legislation and stiff competition from internet players.
In Tabcorp's results on Thursday, CEO Elmer Funke Kupper declined to make a specific financial forecast for the coming year, but warned that 2010 would continue to be uncertain and challenging. Tattersall's and Crown will come out later in the month and all eyes will be on their outlook statements.
But the brutal reality is the potential loss of licences and/or regulatory changes is a growing risk for all casino, gaming and wagering operators, both locally and globally. The local risk hit home last year when the Victorian government shocked the industry by announcing the Tabcorp-Tattersall's duopoly in Victoria - where they each run 13,750 poker machines - would end in 2012.
This will wipe out one-third of Tabcorp's earnings when it cedes the gaming franchise, and it will wipe out even more for Tattersall's. The Victorian government refused compensation, despite legal threats from both companies. The next big decision will be the Victorian wagering licence, which is currently held by Tabcorp until 2012. There are plenty of rivals trying to upset the incumbent and snare the prize.
Tatts Group, which runs the TAB in Queensland, South Australia and the Northern Territory, is jockeying to get the licence to help fill the void that will come from the loss of the Victorian poker machine licence, while offshore giant the Hong Kong Jockey Club is also believed to be a bidder.
Meanwhile, the NSW wagering licence, which is also owned by Tabcorp, does not run out until 2097, but an exclusivity clause that prevents any other licence being awarded to rivals ends in 2013.
The chances of the NSW government, in desperate need of cash, not taking advantage of this clause look slim. The NSW TAB business is valued at us$ 1.4 billion on Deutsche Bank numbers. The regulatory uncertainties in wagering and gaming and the economic downturn hurting casino revenues make for challenging times for the sector.
On the upside, the Tasmanian Tote is for sale, along with the NSW Lotteries operations, which collectively are on the market for us$ 200-400 million and us$ 500-600 million respectively, and will bolster revenues and profits for the acquirer, and hopefully returns. But in the long run, questions are being asked about the future of these listed entities.
As governments need money to plug holes in their deficits, they will continue to squeeze the returns on licences until returns fall to an unacceptable level for shareholders. It is no surprise, then, that speculation continues that Tabcorp will flick the switch and sell itself off to competitors if a few more things don't go its way.
Crown is expected to refocus its energies on Australia and Tattersall's is hoping to pick up what it can.