Crown Shares Likely Face Regulatory Overhang for Several Months

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Crown Resorts Ltd. may face a structural overhaul, including a change in management and the potential sell-down of its largest holder’s stake, after a report said the casino operator isn’t fit to hold a gaming license in Sydney.

The report from retired judge Patricia Bergin recommended that Crown be subject to a 10% ownership cap, well below billionaire James Packer’s current 36% holding, and that key management and directors depart in order to improve the firm’s culture and governance.

While there is likely to be a regulatory overhang on the share price for some time, changes may prove positive in the future as they could make for a stronger board, improved compliance and potential for M&A, according to some analysts.

Crown shares are expected to resume trading Tuesday after being halted Monday. Peer Star Entertainment Group Ltd., which operates the only casino in Australia’s largest city of Sydney, closed 2.6% higher Tuesday, extending gains after the report was released.

Here’s what analysts are saying:

Citi:

  • A forced sell-down by Packer’s investment firm CPH Holdings may open the door for M&A, enabling a trade buyer or PE firm to secure a meaningful stake
  • Shift in focus from revenue generation to compliance likely to see constrained sales and elevated costs
  • Sydney casino project likely delayed for several months; 6-12 month delay won’t “meaningfully” impact valuation
  • Implementation of recommendations to be an overhang on stock for several months
  • “Some of the recommendations may have positive ramifications for the share price as it will promote a stronger board, better governance and the potential for M&A”
  • Maintains neutral, preference for Star

Goldman Sachs:

  • Report outlined clear steps for Crown to get license back and these are consistent with early decisions taken by Chair Helen Coonan
  • Likely to see increased regulatory and compliance burden on Australian casino industry
  • Report likely to result in further delays to gaming operations in Sydney, which Goldman forecasts were expected to account for about 8% of group revenue in 2H FY21
  • Crown to face significant regulatory overhang on share price
  • Now facing heightened M&A probability amid individual holding restrictions and regulatory concerns

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