Competition Between Blackjack Providing Casinos Down Under Heats Up

 
As the Australian gambling market displays some underlying softness we look at what the two largest operators are doing to get ahead and profit in the future.

100 years on from the start of the First World War that introduced an unsuspecting collection of allied armies to the ANZAC betting game of “two-up”, and relieved many of them of their cash in the process, the Australian gambling market has not quite yet reached the stages of digging trenches from coast to coast, but the two big rivals on the scene are definitely looking to dig in and both hold their ground and make big advances.

Both Crown Resorts and Echo Entertainment offer blackjack tournaments and the like at their numerous casino properties across Australia but whilst Echo Entertainment has taken some knocks Crown Resorts has fared better. Echo lost monopoly control of both Brisbane and Sydney recently and earlier this year CEO John Redmond stepped down, mean while crown gained the right to footing in both cities, and has seen investments abroad begin to pay off.

However Echo is far from counted out in this ongoing battle of the giants, as the fickle fortunes of fate ebb and flow sending favor at whim wherever its feeling takes it. Crown’s investments in Melco Crown, based in the gleaming rising spires of gambling mecca Macau, have paid superb dividends and have provided good earnings but there is some concern amongst investors that this is a revenue stream with limitations, which might explain the slide from a $17 share price to one under $15.

This contrasts with Echo’s first six month results that show normalized revenue up by 12.8% and net profits, due to stringent cost cutting across the board, up by a normalized 24.6%. Of course Echo is rising from a far lower position fiscally speaking, but even so these results show that it may well be winning over some of Crown’s inter-state and international VIP market share. However the more modest improvements in Crowns revenues, some 1.4%, were received well by the markets.

Head To Head Battle

With Echo making headway and Crown plateauing out a little in terms of returns the competition between the two is heating up as both seek to make crucial investments in the future of gambling in Australia and beyond. Their ambitions are massive but can they choose the correct opportunities? Only time will tell. Right now they’re both shortlisted in the competition to win the rights to build an integrated casino resort in Brisbane, although perhaps Crown has more at stake in that.

Echo is already spending $345m reinvigorating Jupiters Casino on the Gold Coast and it may have less to lose if they miss out on the Brisbane investment, the Gold Coast still one of the biggest draws for holiday makers, tourists and gamblers in Australia. Meanwhile Crown doesn’t just have Brisbane in its sights, but much bigger and more distant fish to fry, most notably a return to investing in Las Vegas, home of blackjack strategy, where the global crisis wrought a $2 billion wipe out.

This kind of bravery is perhaps the hallmark of James Packer who controls Crown Resorts and has always had an appetite for growth and profitable investment, and he sees the recovery in the desert of Nevada as an opportunity he can take advantage of with private equity group Oaktree putting up some of the money. Whether that is a sound thinking fiscal risk is a matter of some debate as the Las Vegas improvement is tentative at best and still faces some tough times ahead.

Las Vegas might not seem the best investment in the gambling world at the moment given all its competitors but with a growth in sports gambling across the pacific and relatively weak consumer sentiment at home the Australians are looking to be part of whatever wave happens along. The Australian market has seen West Australia and Victoria both show signs of being less fiscally viable than they once were with a distinct softness to margins, so Vegas might be the way ahead.

The Australians Are Abroad

If it transpires that Vegas isn’t the future, Mr. Packer is hedging his bets quite nicely with a massive list of other investments and projects that he wants to get underway. A casino in the Philippines this year, next year a third casino in Macau, and a fifth hotel tower in that self same city to be opened sometime in 2017. These are no small moves, and yet it’s still in Australia where the boldest moves are being made with Crown building a new hotel in Perth and a $1.5bn spend on the Barangaroo in Sydney.

There are also plans from Packer to spend $400m on a resort in Sri Lanka, which legalized and heavily regulated gambling at the end of its bitter civil war in 2010 in a hope of boosting an understandably flagging tourist industry. The partnership with Chinese developer Greenland for Brisbane has a price tag of over $1bn but the prestige alone might be worth it to Crown Resorts and Mr. Packer in particular as it would stamp some superiority over its rival Echo.

In perhaps the shrewdest move amongst the smart strategies at play, Melco Crown have said that should the Japanese ever legalize casinos they would immediately spend over $5bn in the country. This may prove attractive to policy makers on the islands but there’s still an uphill battle to get public and political support in such a traditional country for the regulation of what is still seen as a business associated with unsavory characters and unscrupulous profiteering.

With possible investments of $13bn Crown and Melco are in this for the long haul and are playing for keeps, but there is always the risk that investors will find it hard to swallow such massive capital outlays when the global market still wobbles dangerously and political winds can so easily change direction at the whim of a media led knee-jerk reaction. Whilst Echo might not be top dog it certainly has less at risk and that might attract more investors than the wild-eyed Mr. Packer.