Australia Casinos to Benefit from Crown’s Macau exit

For the average person, when we have too much stuff and need extra money, we often host a yard sale. We get rid of things we don’t need or want anymore, selling them for extra funds to buy new things, or pay off that lingering credit card bill.

That’s pretty much what Australia casino firm Crown Resorts did when it divested itself of the final remnants of shares in Melco Macau.

The divestment of Melco Crown Entertainment (MCE) began last year, revolving around the arrest of multiple Australian employees of the Macau casino property by Chinese authorities. They were accused of violating the country’s laws by advertising gambling to Chinese players.

Crown’s owner, James Packer, sold a large stake in MCE in May 2016, dropping the company’s shares from 34.3% to 27.4%. Months later, another sale saw Packer’s investment in MCE fall to 11.2%. Soon thereafter, MCE was rebranded Melco Resorts Entertainment (MRE), reflecting the dwindling role of Crown in its operation.

Then last week, the company announced it would sell all remaining shares in MRE, thereby exiting the Macau market entirely.

Proceeds to Benefit Australia Casinos

This week, the Australia casino firm proclaimed that the proceeds from the sale – valued at about AUD $1.34 billion – will be used to pay down Crown’s considerable debt. The company filed documents with the Australia Securities Exchange, stating:

“…Crown Resorts is expected to generate net proceeds of approximately US$987 million or AUD1.34 billion (equivalent to US$5.97 per Melco Resorts ordinary share and US$17.91 per Melco Resorts American depository share) which will initially be used to reduce Crown Resorts’ net debt.”

So Much Revenue, So Much Debt

Note the filing uses the term “reduce”, indicating that “Crown Resorts’ net debt” is by and far larger than $1.34 billion will cover. For 99.9% of the Earth’s population, it seems unfathomable that a billion dollars wouldn’t cover a debt. But in the integrated casino resort business, it’s more common than you might think.

In fact, Crown reported a total debt of $2.28 billion in 2016. As high as that sounds, it’s better than the $2.66 billion reported in 2015, and does prove that – with this pending debt reduction – the Australia casino firm is working it’ way back towards the good.

There’s no question that Australia casinos – casinos all over the world, for that matter – make incredible amounts of money every year. Yet on the whole, they are some of the most indebted businesses on the planet.

In 2013, Caesars Entertainment, the fourth largest gaming company in the world, recorded US$8.6 billion in revenue. But that wasn’t nearly enough to help the company climb out of an execrable pit of debt. In January 2015, Caesars filed Chapter 11 bankruptcy protection, has been working to restructure its debt ever since.

Take a look at New Jersey. Atlantic City – once referred to by Americans as ‘the Las Vegas of the East‘ – lost nearly half of its casinos since 2014. That year, the Atlantic Club, Revel, Showboat and Trump Plaza all went out of business, followed by the closure of Trump Taj Mahal in 2016.

The problem is that, despite the massive amounts of revenue US and Australia casinos bring in, their money management skills are horrendous. They are their own problem gamblers, taking out credit and risking it all in hopes of drawing more bettors to a property.

They spend hundreds of millions, if not billions, of dollars on every new property they build. Then they spend more to renovate old properties and usher in new amenities and entertainment venues.

Casino resorts may be the embodiment of sheer opulence on the outside, but underneath all that elegance, they are becoming one of the most unprofitable businesses the word has ever known.