Does Blackstone have a Crown Resorts shaped problem?

One of Crown’s biggest problems is its $2.2 billion tower in the heart of Sydney’s CBD that was designed to service VIP foreign high-rollers who have not returned to Australia since the pandemic. Crown Sydney has been operating under a conditional licence for one year and has completely changed its strategy to be more focused on its hospitality offerings. This has been welcomed by the regulators and the public, but it makes it harder to generate big profits.

Although its hotel and restaurants are nearly always full, Crown Barangaroo has been forced to close one of its two VIP only gaming floors, reduce its casino operating hours and make 275 people redundant just one year into operating.

Despite this, the NSW government recently ignored Crown’s plea to reduce a looming tax agreement which will mean it has to pay about $1 billion in additional taxes over the next 10 years that was negotiated before the business transformation.

Wall Street’s consensus forecast – at the time the acquisition was finalised – was that Crown would generate more than $700 million in annual operating earnings (before interest, tax, depreciation and amortisation are included) both last financial year and this financial year.

These projections seem overly optimistic given the regulatory and structural challenges which were known to the market at the time.

It’s difficult to discern the true profitability of private companies as they’re not bound by the same continuous disclosure requirements as their public counterparts. Instead, Crown submits an annual financial report to the corporate regulator each June. These private accounts rarely give a completely accurate picture of how a company is performing.

Nevertheless, its most recent filing revealed that Crown posted a $199 million loss last financial year. Its $3 billion expense bill wiped out the $2.7 billion in revenue it accrued across its casinos, still affected by the hangover of COVID-19 and the cost of regulatory compliance which came with whopping one-off penalties.

Its first year under the helm of Blackstone was a significant improvement on the near $1 billion loss recorded the year prior, and it’s unlikely those sizeable one off costs will be repeated.

Crown’s approximate earnings (before interest, tax depreciation and amortisation) across its three casinos was $145 million for 2023, according to investor analysis of the report seen by this masthead. Blackstone disputed this calculation but did not provide an alternative number.

“Drawing conclusions from dated financials ending June 2023 is misleading when Crown’s performance was significantly impacted by COVID as well as costs and fines related to previous ownership”, a Blackstone spokesperson said.

“Crown’s transformation benefits from Blackstone’s extensive operational experience and ownership by funds with nearly $US70 billion of committed capital.”

Some US investors are concerned there is a real risk Blackstone may end up unable to pay back the debt because it has miscalculated the ability for the business to rebound.

Blackstone is adamant these investors are wrong and is confident its track record of transforming struggling companies will hold true. Sources within the company who were not authorised to speak publicly said Crown’s existing challenges are largely in step with Blackstone’s initial expectations so long as earnings improve soon. Importantly, Blackstone told this masthead it is meeting all of its debt servicing obligations.

According to Blackstone correspondence to investors seen by this masthead, it is paying $US543 million ($799 million) in interest on the loan each year – more than five times Crown’s estimated earnings before interest, tax, depreciation and amortisation last financial year.

About a quarter of the debt was provided by Blackstone Mortgage Trust, which is listed on the New York Stock Exchange. This $US851 million injection ($1.2 billion) is less than 4 per cent of its $US22 billion loan book but represents almost 20 per cent of its $US4.5 billion ($6.6 billion) in equity, according to its recent financial disclosures. 

Blackstone Mortgage Trust was recently shorted by well-known short seller Muddy Waters, which put the businesses on notice. The stock initially shed 8 per cent but has rebounded in full.

The investors in Blackstone Mortgage Trust – who claim Crown Resorts won’t meet its debt obligations – say the debt is levered well above market standard despite its moderate risk rating. Blackstone disagreed and said it was misleading to infer Crown was at any risk of defaulting on its debt obligations.

Crown’s recent financial disclosures confirm its “current liabilities exceed its asset position”. Its “going concerns” section of the financial report reveals it has received a letter of financial support from Blackstone and will continue to meet its liabilities for the next 12 months “at minimum”.

It also said the business outlook would remain uncertain until the three state regulators determine whether Crown can regain its coveted casino licences next year. Each casino is currently operating under a provisional licence under the watchful eye of their respective regulator.

Loading

Crown’s chairman, Bill McBeath, told The Australian Financial Review in September that Blackstone underestimated the size of the remediation task at Crown, but he was confident about the firm’s track record of transforming struggling businesses, including casinos.

“Did we underestimate it? Yes. Is the body of work larger than we thought it would be? Absolutely.”

“I’ve seen 9/11, I’ve seen 2008, I’ve seen the bursting of bubble. And gaming and integrated resorts have always proven to be incredibly resilient over time, if they’re in good locations, and they focus on guest experience,” McBeath said.

Analysts who cover ASX-listed rival Star Entertainment Group – which is also in the midst of a similar remediation process – believe it peaked last year. Investment bank Barrenjoey forecasts The Star’s operating earnings to remain lower for at least the next decade due to looming tax hikes and the cost of regulatory compliance.

It will likely take years before it’s clear whether Blackstone can overcome the structural challenges Crown faces given the continued regulatory uncertainty which hangs over all casino businesses in Australia.

Packer, of course, doesn’t need to worry about any of this. He’s long gone. But it’s worth noting one of the largest ever private equity losses in Australian corporate history occurred when CVC Capital lost close to $2 billion on Nine Entertainment (publisher of this masthead) in 2012.

The billionaire who sold Nine to CVC in the first place? None other than James Packer.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.