SkyCity Entertainment Group should consider cutting its losses and running from its investment into its Australian casino property, SkyCity Adelaide, given the property’s cumulative losses and recent M&A interest in the sector, according to investment first Forsyth Barr.
In a Wednesday note, Forsyth Barr analysts Paul Laxton Koraua and Andy Bowley said their calculations have SkyCity Adelaide delivering a cumulative cash loss of AU$420 million (US$300 million) in the 25 years since SkyCity purchased the asset from the South Australian government for AU$180 million (US$129 million). These losses take into account investment of AU$730 million (US$522 million) into the precinct, including AU$200 million (US$143 million) in regulatory costs, while delivering only AU$315 million (US$225 million) of estimated cash earnings.
“The capital drain remains ongoing, with the AU$21 million (US$15 million) South Australian regulatory fine to be paid; the B3 (Building a Better Business) program running over schedule and investment into the implementation of mandatory carded play,” Forsyth Barr said.
“We believe SkyCity would be a better business without Adelaide, with the potential divestment materially improving the balance sheet position.”
The analysis of SkyCity Adelaide comes after the Auckland-based parent recently announced a strategic review into the asset and subsequently revealed that it had earlier this year received and knocked back two bids to purchase the whole company. One of those is said to have been from Sydney billionaire Sam Arnaout’s Iris Capital, which owns Casino Canberra and Lasseters Hotel Casino in Alice Springs, recently acquired Reef Hotel Casino in Cairns and has been eying up Skyline Enterprise Ltd’s Christchurch Casino.
According to Laxton Koraua and Bowley, it is clear that certain parties remain interested in acquiring Australasian casino assets and a similar move for SkyCity Adelaide appears feasible – despite the regulatory hurdles for such transactions involving casino operations typically being more onerous than regular change-of-control transactions.
“Our analysis did not identify any clear regulatory block for an acquirer to transact on part or all of SkyCity’s casino assets,” the analysts wrote.
“We do note that both the Department of Internal Affairs (DIA) and the South Australian Government would need to be satisfied that the potential acquirer meets their respective suitability tests. We also note that Overseas Investment Office approval would require the transaction not to be found contrary to New Zealand national interests.”
Such a sale would, the analysts added, be viewed favorably by the market.
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