Something I had not heard mentioned before.......

Is merger a solution for troubled casino groups?

With SkyCity Entertainment and Star Entertainment both strapped for cash after facing allegations of breaching money laundering rules, is it time to revisit a potential merger?

The topic occupied plenty of discussion in 2016, when Macquarie Capital and Flagstaff Partners were working for The Star Entertainment Group nutting out possible merger options with SkyCity, advised at the time by Credit Suisse.

At that time, a merger could have created a $7bn casino operator. And apparently there was a deal that was on the brink of being done in June of that year and was abandoned at the final hour.

At that time, SkyCity’s share price was trading above $4.50 and a scrip merger with Star Entertainment would have delivered shareholders a price of over $5.

However, a disagreement between both chairmen (Sky City’s Chris Moller and Star’s John O’Neil) derailed the plans and SkyCity then turned around and raised equity. Mr Moller and Mr O’Neil were former chief executives of the New Zealand and Australian rugby unions respectively and fell out over Rugby World Cup negotiations.

The synergies bringing the two together have always been considered to be enormous. Star’s casinos are in the Gold Coast and Sydney, and SkyCity has Auckland, Hamilton, Queenstown and Adelaide locations. However, now it’s a different environment, where they are both under scrutiny from regulators and regulatory requirements are far greater.

Experts think the likelihood of a merger is low, with the deal being a $3bn one rather than one worth $7bn.

The plan for private equity was to do just that, but even they are missing from the action.

And Australia and New Zealand have lost their shine as a market for the Las Vegas operators, due to the tougher regulatory stance towards gambling that makes the market less appealing to high rollers.

The year of 2016 was the one that Tatts and Tabcorp agreed to merge, so some wonder if the moment has been lost for the casino operators, now cash strapped and out of favour with prospective buyers.

Star Entertainment, now run by ex-Crown Resorts and Lendlease boss Steve McCann, has raised equity twice as it faces fines for breaching anti-money laundering laws.

SkyCity has averted an equity raising for now by suspending dividend payments until fiscal 2026, as it pays out for breaches and downgrades earnings.

Macquarie analysts believe its debt levels, last at $500m, would peak in the 2025 financial year at 2.9 times earnings before sloping off and are below the covenant of 3.75 times.

“The balance sheet would likely be topical near term, given the earnings degradation, monetary penalties which at a worst case could be $NZ198m, excluding the impact from the possible 10-day licence suspension in New Zealand, and the move to suspend dividends until at least fiscal 2026,” they said.