No pokies, no Ho and no Chinese VIPs: Packer's Barangaroo challenge
The NSW government cemented the near term financial fate of James Packer’s Crown casino at Sydney's Barangaroo with the stroke of a pen on Friday when it inked a deal with rival The Star confirming its exclusive casino rights to operate poker machines for 21 years.
Crown’s lobbying efforts to alter the terms of its existing agreement that would have banned pokies from Barangaroo had been secretive but determined and abiding.
Over the years the lobbying had been spearheaded by Crown executive and former national secretary of the Labor Party Karl Bitar and former federal Labor minister now Packer lobbyist, Mark Arbib.
Crown Sydney casino is set to open in December. Credit:Rhett Wyman
Government insiders have suggested that Crown came close to signing a memorandum of understanding a few years ago with the then-NSW opposition leader Luke Foley to revisit the Crown poker machine ban.
Under the government agreement signed with The Star, if the exclusivity deal is altered the incumbent casino pokie operator will receive unspecified compensation. (Curiously the government’s press release said only that poker machines would not be operated at Crown for 21 years, making no mention of compensation.)
Many casino analysts had assumed a strong likelihood that Crown would ultimately be successful in its quest to remove the slot ban.
The Star’s share price initially spiked more than 4 per cent on Monday and the regulatory certainty on slots was only one of the reasons - but the one its board had been sweating on. The partial opening of Star’s Sydney casino facility on Monday and a new tax deal with the NSW government were the other two pieces of news that sent shares higher.
For Crown, having its poker machine ambitions thwarted places additional pressure on the economics of its Sydney casino whose licence approval was originally successful on the basis that it would be an ultra VIP casino that would cater to Asian high rollers rather than an Australian market.
Not only did the international VIP market fall precipitously after Crown employees were arrested in China in 2016 (from which it has never fully recovered) but COVID-19 has successfully killed international tourism for an unknown period - which affects all Australian casinos.
Additionally, the growing diplomatic tension between Australia and China may lead to heightened pressure from the Chinese government to discourage VIP punters spending in Australian casinos.
And gone now are the hopes that Lawrence Ho’s Melco could help funnel VIP players into Crown. Melco bought a 10 per cent stake in Crown from Packer last year and agreed to increase his holding to 19.9 per cent. The second tranche of the deal was later abandoned and Melco sold its 10 per cent a month ago.
Barangaroo was always supposed to be more leveraged to the international VIP market.
Indeed, it was in 2013 that then-NSW premier Barry O'Farrell declared that so wealthy would Crown’s Barangaroo’s Australian patrons need to be that not even he would be allowed through the front door. “There will be very few people of the net worth that is required to be in those rooms ... Presumably if you're a local billionaire – I don't know whether Gerry Harvey and Kerry Stokes are gamblers – but I suspect if you're a billionaire, you might get an invitation. But if you're Barry O'Farrell, with a mortgage at Turramurra . . . I doubt that I'd ever be invited ... What the Barangaroo proposal from Crown is all about is a six-star hotel to support Asian tourism," he said.
But over the years regulatory creep grew to regulatory cascade and the marketing pitch started to devolve. From a casino designed to cater to super-wealthy offshore players, it is now looking to attract locals that need only enough cash for $30 punt on baccarat or $20 per hand of blackjack.
Evidence of Crown’s Sydney new target market was neatly illustrated by a report in The Sydney Morning Herald and The Age last week that revealed the company had been inviting RSL club regulars from Western Sydney to sign up to Crown Sydney’s loyalty program.
Meanwhile, the key change to Star’s new tax deal relates to the introduction of flat tax rates on domestic revenue from poker machines and table games after 2021.
From a casino designed to cater to super-wealthy offshore players, it is now looking to attract locals that need only enough cash for $30 punt on baccarat or $20 per hand of blackjack.
For the first three years Star will pay a tax rate of 32 per cent of electronic gaming revenue, which will increase to 33 per cent for the following three years and 34 per cent for the remaining 14 years. On tables it will pay a flat rate of 29 per cent. In the 2019 calendar year Star paid an overall rate of tax on domestic revenues of 31.5 per cent.
Macquarie analysts now anticipate the average tax rate on combined tables and electronic gaming will be 30 per cent after 2021. Previously Star paid tax on a sliding scale and was proportionately disadvantaged as revenue rose.
But it could be a while before Star and Crown need to focus on tax. Right now opening their doors and generating revenue would be their primary concern.
Elizabeth Knight comments on companies, markets and the economy.
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