Opinion | Vegas high-roller spins USD7 billion roulette wheel

Wynn Resorts Ltd. has been on the defensive lately with investors. The Las Vegas-based casino operator’s offer to buy Australia’s Crown Resorts Ltd at a hefty-looking 26 percent premium would not have changed that.

That the U.S. company needs to diversify is in no doubt. At home, it’s still struggling to move on from sexual harassment allegations against its eponymous founder and former chairman Steve Wynn, which deterred investors for a while. He has since sold his stake and exited the company.

But another problem looms. While Macau has been a cash cow for Wynn, that might not be the case for long. In 2022, Wynn Macau, the company’s 72 percent-owned unit, will face the renewal of its license in the former Portuguese enclave (along with five other operators, including Sheldon Adelson’s Las Vegas Sands Corp.). If reports are right, Beijing may force it to tie up with a local or mainland Chinese partner, thus cutting Wynn’s share of the gains. Macau’s gaming sector growth is slowing too.

Australia, the world’s third-largest gambling market by gross gaming revenue, isn’t necessarily a bad place for the U.S. company to spread its wings. Crown, controlled by billionaire James Packer, has casinos in Perth, Melbourne and a development site in Sydney harbor, plus a smaller venue in London. It has another big development project in Vegas too, offering the possibility of combining local operations.

But even setting aside price, there are two reasons to worry about the deal: First, Australia is already suffering from a decline in gambling revenues and an economic slowdown; second, and more important, it’s about to get some serious regional competition from Japan.

After years of agonizing, Japan legislated to allow casino gaming in 2016 and laid out a road map for the industry last year. Tokyo has yet to award its licenses for “integrated resorts,” but many people expect the country to become the world’s biggest casino market after Macau (Vegas is second currently), catering not just to Chinese tourists, but also pent-up domestic demand.

All of this does make Wynn’s offer look a little lavish. The price tag of AUD14.29 per share values Crown’s debt and equity at almost 12 times forward earnings, versus the current 9.2 times, says Bloomberg Intelligence analyst Margaret Huang. That’s a pretty big gamble on a company that’s had its own troubles.

Crown quit Macau in 2017, when it exited Melco Resorts and Entertainment Ltd. after 19 of its staff were arrested for “gambling crimes.” All 19 have been released, but many junket tour operators, who bring in prized VIP gamblers, are still steering clear of the operator. Crown’s revenue fell in the first half of this fiscal year, and its net income has suffered since the loss of Macau. It’s hard to see where growth will come from.

One way to look at this bid is that if Wynn’s willing to wager USD7 billion on Australia, it’s not holding out much hope on getting in on the Japan action, or is possibly balking at the estimated $10 billion cost of building an integrated resort there. Geographical diversification does make some sense, but this is an expensive way of placing your chips. Nisha Gopalan, Bloomberg