HONG KONG (Reuters Breakingviews) - Wynn Resorts wants a new beginning Down Under. The casino giant is looking to buy Australia’s Crown Resorts for A$10 billion ($7.1 billion). Both companies are on the rebound after breaking up with billionaire bosses last year, but Wynn may be rushing into this relationship. The hefty 26 percent premium on offer stakes way too much on the return of big spenders.
Eager investors sent Crown’s shares soaring by more than a fifth after the company announced the offer on Tuesday morning. The two companies do have a certain chemistry. Both are known for swanky resorts, popular with high rollers; and both court Chinese VIPs. They are also recovering from a rough year. Last February saw Steve Wynn depart his namesake group after a protracted sexual harassment scandal. A month later Crown founder James Packer resigned from his company’s board for mental health reasons.
But a back of the envelope calculation suggests Wynn has gotten a bit too starry-eyed over Crown, which has seen its share price tank 20 percent from last year’s summer high. After taxing Crown’s expected operating profit at last year’s rate and dividing by the offer’s enterprise value, the implied return on invested capital would be about 4 percent. That’s well below the 8.4 percent weighted average cost of capital Morningstar estimates for the Australian target.
Substantial synergies might improve the picture, though their properties are scattered across continents, making it harder to capture cost savings. They could still share knowledge and networks of VIPs. But a slowing Chinese economy has put the squeeze on wealthy patrons around the world, and Wynn is already spread thin: a second resort it built in Macau – a market Crown abandoned in 2017 - might be cannibalising from its own client base.
Optimists may harbour hopes for a revival: high rollers are unpredictable, and before the downturn Crown’s shares traded close to the offer price of $14.75. But the region’s roster of ritzy resorts is growing quickly as new casino towns spring up to tap Asia’s wealth; the Japanese government’s plans to allow gambling will further up the ante. Crown investors may cheer, but Wynn could come to regret this match.
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