James Packer has now spent just over $400 million buying Crown shares in the past 12 months. Is it simply that he just sees value or is he preparing the ground for something more strategic?

Exactly a year ago Packer spent slightly more than $200 million to lift his interest in Crown from 37% to 40%. Yesterday he filed an announcement with the ASX saying he had increased it a further 3% to 43% at a cost of $201 million.

As it did last year, the move has reignited speculation that he might be preparing the ground for a privatisation of his casino empire. While that’s possible, it would appear the least likely of the explanations. Regulators prefer their casino operators to be listed and transparent.

The more obvious explanation is that he simply sees good value. Crown’s Melbourne, West Australian and Macao casinos are performing well and the two Australian casinos are in the midst of a massive $1.1 billion-plus refurbishment and expansion program that Packer presumably believes will increase their returns significantly. Both casinos are adding substantial new gaming capacity.

With Crown’s share price essentially flat-lining over the past year, Packer may believe that the market is under-valuing its potential and therefore it’s a good time to buy more of a good thing. He didn’t need the extra 3% to secure his control.

The more interesting possibility is the perennial speculation of a merger/acquisition of Tabcorp.

Tabcorp is also in the midst of a major $860 million upgrade of its Star City casino complex in Sydney and has also flagged the possibility of a $600 million or so refurbishment of its two Queensland casinos.

Tabcorp and Tatts Group will lose their Victorian gaming businesses in 2012, when their licences expire. It is also possible that Tabcorp could lose its Victorian wagering business at the same time, with the Victorian government likely to announce its plans for the licence after the state election.

If that occurred, it would have significant implications for the future of Tabcorp’s NSW wagering operations — it makes more sense for the Victorian and NSW businesses to be owned and operated by a single player.

In any event, the refurbishment and expansion of Tabcorp’s casinos and the loss of the gaming licence means that it is steadily becoming more of a casino business and the Packer family has long coveted Star City.

Tabcorp also faces continuing pressure from its own shareholders to demerge the casinos — speculation that it is reconsidering a demerged resurfaced this week — and, if it retains the wagering licence, to consider merging those operations with Tatts.

At the moment Crown isn’t able to consider acquiring Tabcorp because no one can hold more than one of the gaming licences. That obstacle to a deal with Tabcorp as it is currently structured falls away in 2012.

If there is to be a deal that merges Tabcorp and Crown, or just Tabcorp’s casino interests and Crown, it would probably have to involve a significant scrip component to be attractive to Tabcorp shareholders and financeable by Crown.

By lifting his Crown shareholding, Packer would give himself the option of a scrip-based deal with Tabcorp that wouldn’t dilute his shareholding to the point that he effectively relinquishes control.

One of Packer’s convictions — first demonstrated by a very youthful Packer during the pay TV wars in the 1990s, where he had bets on all the players — is that he believes in always ensuring that he has as many options as possible to respond to opportunities or changes in circumstances. There doesn’t have to be a single or simple explanation for the increase in his shareholding, which can be justified simply on value terms, but it does create options.

Peter Fray

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