Australia-listed Donaco has falling revenue, no CEO, a multinational legal dispute with a major shareholder, a new largest shareholder that wants out, a gutted share price and a pair of unmatched frontier market border casinos. Otherwise, it’s doing great.
Donaco International’s falling out with the Thai politician who sold it Star Vegas has halved property EBITDA while entangling Donaco in legal proceedings in four jurisdictions, prompting a “strategic review” of the company’s future.
Amid the tumult, Managing Director/CEO Joey Lim took a leave of absence then was “terminated” and forfeited his equity to a secured lending specialist, now Donaco’s biggest holder of shares languishing below AU$0.10 (US$0.07) after trading above AU$0.60 when it bought Star Vegas.
Here’s a recap of how Donaco, which also owns Aristo International on Vietnam’s border with China’s Yunnan Province, got here and where it may go.
In 2015, Donaco made its self-proclaimed “transformational” acquisition of Star Vegas in Poipet, the Cambodian casino cluster closest to Bangkok, just over three hours drive away. Somboon Sukjaroenkraisri sold Star Vegas for US$360 million, including 148 million Donaco shares, 18% of the company, then valued at US$120 million.
“We structured that deal with one-third of the price in shares to align his interests with other shareholders,” Donaco Executive Director Ben Reichel says.
Reichel rejects as “lazy” criticism that Donaco never should have bought Star Vegas due to Cambodia’s legal and regulatory status. Former Australian gaming regulator Peter Cohen of The Agenda Group says, “I don’t believe that the lack of regulatory control is in itself problematic, but any Australian-listed company has obligations to comply with AML and anti-corruption rules wherever they operate.”
Donaco hasn’t faltered on those fronts.
HIGH MARGIN
Donaco gave Somboon a two year contract to manage Star Vegas through 30 June 2017. He guaranteed US$60 million annual property EBITDA, met the targets – posting margins of better than 60% – and earned management fees equivalent to roughly one-third of EBITDA. Experts call the fee rich but not outrageous.
Those two years weren’t all smooth sailing, though. Donaco’s stock price fell following the acquisition and US$55 million Aristo’s rollout into China-Vietnam tensions and President Xi Jinping’s corruption crackdown. Thailand’s king passed away in October 2016 and mourning decreased Poipet revenue.
Somboon’s Star Paradise hotel, across the street from Star Vegas, added gaming areas in 2016. Donaco says it wanted Star Paradise gaming to accommodate new junkets, although Star Vegas had ample space for gaming expansion. Others say Somboon wanted his own casino again.
What’s clear is that Somboon has a non-compete clause barring him from opening casinos in Poipet, and that Donaco managed the Star Paradise facility for a US$150,000 monthly fee. In a March 2017 interview with Inside Asian Gaming, Joey Lim said Donaco hoped to extend Somboon’s Star Vegas management contract and, in case Thailand legalized casino gambling – Poipet’s nightmare – Donaco would rely on Somboon’s Thai connections to seek a license.
BIG ASK
Three months later, though, Somboon’s Star Vegas management contract expired unrenewed.
“When we negotiated to extend, his ask was too much and [Donaco] decided to manage it thereafter,” Lim recalls. Attempts to contact Somboon were unsuccessful.
Donaco was removed from Star Paradise but casino operations continued, and Star Vegas mainstay junkets relocated there. Star Vegas FY17/18 VIP turnover decreased 52%, gaming revenue fell 40%, EBITDA dove 52% and Donaco wrote down Star Vegas’ license value by AU$143.9 million. In the first half of FY18/19, revenue stabilized but EBITDA fell 29% to AU$13.2 million, and Donaco wrote down another AU$38.2 million of license value.
Donaco has tried to rebuild the business by recruiting new junkets from Thailand and beyond, upgrading facilities and initiating online gaming, with spotty results. It’s obtained injunctions against Star Paradise, subsequently renamed Winsor, and Star Paramax, a casino up the road behind a supermarket. Both continue to operate and a larger casino is under construction.
A hearing is scheduled for June in Singapore on Donaco’s US$190 million arbitration claim against Somboon. In Australia, Donaco has frozen Somboon’s 148 million shares and withheld payment of a AU$19 million management fee. Asked about the effectiveness of legal actions, Reichel says, “Our job is to achieve the best result for our shareholders.”
Somboon is suing Donaco in Thailand for defamation and in Cambodia to overturn Donaco’s lease on the Star Vegas land, which he still owns. He reportedly hasn’t cashed Donaco lease payment checks to bolster his claim.
WILD CARD LENDER
The wild card is Orchard Capital Partners (OCP) Asia. Lim defaulted on a loan, giving OCP Asia his 27.25% Donaco stake. OCP Asia bought an additional 9.35%. Lim, who remains on Donaco’s board, has appealed to Australia’s Takeovers Panel to stop the market purchase.
Now Donaco’s largest shareholder, OCP Asia did not respond to requests for comment. It has lodged the former Lim holding with a custodian, suggesting it wants a quick sale, and taken no role in Donaco operations, sources say, including the 10 April appointment of former Australian gaming regulator David Green to Donaco’s board.
Separately, Donaco will soon complete its strategic review that could recommend a breakup.
“In the Board’s view, the current share price is in no way reflective of the value of the company’s assets,” Donaco’s December review announcement states.
Global Market Advisors Senior Partner Andrew Klebanow calls Star Vegas and Aristo “distinct properties with completely different business models. While there are some companies that can manage diverse assets in distinctly unique markets, most cannot. In this case, there is probably greater value in selling each individual asset than combined.”
Even in bad times Star Vegas produces three times the gaming revenue and EBITDA of Aristo.
“Star Vegas is still number one in Poipet and a great property,” Fortuna Investments Director Tim Shepherd, a co-founder of Australia-listed frontier market casino operator Silver Heritage Group, says.
Notwithstanding increasingly possible Thai casino legalization, Poipet has room to grow, with a rail link near completion and an airport in development. Star Vegas could attract interest from Macau junkets or other Poipet operators, notably Somboon.
Payback
Co-founder Joey Lim lost his shares through a loan to help Donaco acquire Star Vegas
Joey Lim founded Donaco (ASX ticker DNA) in 2002 with his late grandfather, Genting Group patriarch Lim Goh Tong. As Managing Director and CEO, Lim spearheaded Donaco’s expansion in Lao Cai, Vietnam, and acquisition of Star Vegas in Poipet. In December Lim took temporary leave “to deal with medical and personal matters,” Donaco told ASX. In March, Donaco “terminated” Lim without explanation, though he remains a board member.
Lim shares perspectives on Donaco with Inside Asian Gaming Editor at Large Muhammad Cohen in edited excerpts below. Not discussed were Lim’s ouster and lawsuits over his father’s estate against his uncle Lim Kok Thay, Genting’s chairman.
Muhammad Cohen: Why did you take a loan from OCP Asia? Why wasn’t it paid back?
Joey Lim: The OCP transaction was first conducted back in 2015. OCP granted a facility to me and my family to subscribe to the DNA rights issue raising money for the US$360 million acquisition of Star Vegas.
In 2015 the pledge of shares was only one-third of the total holdings at AU$0.60. Over time, with the legal action against the Thai vendors as well as the competition from the same vendors, the DNA share price suffered and further collateral in the form of shares needed to be pledged, leading to the total of my holdings being pledged in early 2018.
I had been servicing the principal and interest payments in a timely manner up until late 2018 when my divorce proceedings hit me hard financially. I was unable to make one payment in November 2018 for the sum of circa US$440,000.
MC: Did Donaco know Star Vegas seller Somboon Sukjaroenkraisri was building a casino across the street? Did the non-compete agreement cover that?
JL: We were unaware of Somboon’s developments on his land outside of what he had sold to the company in 2015.
The non-compete clause in the management contract signed with Somboon covers non-compete by him, his family members and his lands for the whole of Poipet for perpetuity. It even restricts him from leasing land to third parties for casino operations. The contracts were all signed under Singapore law as a jurisdiction, and so proceedings and enforcement will be effected in Singapore.
There are several legal proceedings in Cambodia as well and I believe updates have been given to the public. Given the size of the investment by DNA and the multinational nature of the company, we have full faith in the legal system of both countries.
MC: Some sources say conflicts became personal between you and Somboon. Is a settlement more possible with you on the sidelines?
JL: Rest assured that proceedings are carried out in the utmost professional manner, and there are no personal vendettas by the company, its board nor staff against Somboon.
A settlement is not out of the picture. It is just a matter of how far Somboon is willing to make remedies to the company on its complaints
MC: Should Donaco sell Star Vegas?
JL: As you can see from our latest filings, even during adverse business conditions, DNA Star Vegas continues to be profitable. I believe it is in all shareholders’ best interests to see out a resolution with Somboon either in or out of court, then we can focus on growing and managing the property with full purpose. There is a lot of potential in Poipet yet to be realized, with a new train terminal under construction and airport slated for 2020. Capacity to the city will increase.
MC: Is there synergy between Aristo and Star Vegas?
JL: There is no current synergy between Aristo and Star Vegas and that is the business model of DNA, seeking independent captive regional properties.
