A licence to print money?
When SkyCity managing director Nigel Morrison first sat down at the negotiating table with Government officials over how to build the new international convention centre, he played a high-stakes bluff.
His wish-list included 850 new poker machines, a casino licence in Wellington, and a perpetual licence for his flagship Auckland casino. Like any good gambler, he knew when to fold and when to back his hand. On the other side of the table, the Government was already politically committed to sealing a deal, so arguably had the weaker hand.
How good was SkyCity's winnings from that deal? An Australian casino consultant believes the Government significantly undervalued the gambling concessions it finally granted to SkyCity.
The Government's own officials consistently raised concerns as far back as 2010 that the nub of the deal - the 27-year extension of SkyCity's exclusive Auckland casino licence - was being similarly undervalued. Across the ditch, casino licences have sold for hundreds of millions of dollars.
But Steven Joyce, the Minister of Economic Development, defends the valuations. "Our assessment, and [that of independent consultant] KordaMentha, is that it is a fair deal for both parties."
As one would expect, SkyCity echoes the minister's "fair deal for all" assessment.
Signed on July 6, the deal commits SkyCity to foot the $402 million cost of building and operating the New Zealand International Convention Centre in Auckland. In return, it received a suite of concessions.
These included the rights to operate 230 extra poker machines, 40 new gambling tables, a casino tax freeze for seven years, allowing technological advances that will generate more revenue, and the crucial extension, until 2048, of SkyCity's exclusive Auckland casino licence.
The agreement is not quite a finished deal as it requires a law change. A bill enabling the deal passed its first reading this month and is expected to become law by the end of the year.
Papers released by the Government this month detailed the terms of the final deal, including the total value of SkyCity costs and the regulatory concessions it gained.
Offsetting the $402m development costs, SkyCity's gaming concessions were estimated at $370m and the extension to its gaming licence at $90m. When all other factors were thrown in, the deal ended up $67m in SkyCity's favour. This was labelled a premium for the risk it was taking on the development.
The Government had earlier had KordaMentha assess the deal and its numbers underpinned the final agreement. It concluded that, overall, the casino company was likely to gain $67m, although in a worst case that gain could shrink to zero. But others have challenged these conclusions.
Sudhir Kale, a professor of marketing at Bond University in Queensland, has worked as a consultant at casinos on five continents. His consulting included a stint for Galaxy in Macau where Morrison, before he worked for SkyCity, was chief financial officer.
Kale says the deal was a clear win for SkyCity. "He's a friend, but if you want to quote me you can say: ‘Morrison did an excellent job negotiating with authorities'."
After looking at the numbers in the KordaMentha report, Kale says the most striking aspect is the conservative treatment of the concessions given to SkyCity, particularly valuing the extra pokies and gaming tables.
These will provide a big boost to SkyCity's Auckland gaming earnings, he says. "Right off the bat, you're increasing your revenues by 20 per cent.
"Typically, a slot machine in New Zealand will earn $150,000 a year, so that by itself will be $34.5m - every year. Even more striking is the table games. In Auckland, the table games make $1.8m each year, so you're looking at $70m each year."
These revenue figures were likely to grow in the future, given the increasing Asian population in Auckland who are more likely to gamble, he says.
Assuming conservative margins of 25 per cent on the tables and 50 per cent on pokies to cover taxes and labour costs, Kale calculates the new machines and tables alone will boost SkyCity's profits by nearly $35m annually.
Using KordaMentha's assumptions, Kale's calculations suggest the worth of the extra pokies and table machines alone to be $340m. That is much higher than KordaMentha's assessment, which ranged from a low of $167m to $216m, without taking into account other gaming concessions.
"It does not compute," Kale says. "This convention centre is costing $402m? This can be made in three years with this boosted revenue alone."
KordaMentha noted its assessments were based on information from SkyCity, as well as broker reports analysing revenue increases after similar machine and table expansions in casinos in Australia.
K ALE described the 27-year extension to SkyCity's exclusive licence in Auckland as icing on the cake. "Basically, they got that for free."
Valuing such an licence extension is tricky, with KordaMentha saying the Government and SkyCity initially agreed on $75m. "We understand that this figure has been arrived at through negotiation rather than detailed financial analysis," the report said.
KordaMentha said the figure was "broadly reasonable". Its own assessment of the licence value gave a range from $65m to $115m, with a likely midpoint of $90m. The report also said the extension would prevent future governments from adopting a model similar to Australia's, where prices were more openly set.
Internal correspondence from the Department of Internal Affairs indicated an awareness of the experience across the Tasman, noting as far back as September 2010 that licence and exclusivity extensions were valuable and that, in Australia, similar rights were sold for tens to hundreds of millions of Australian dollars.
While SkyCity's New Zealand licence does not grant specific exclusivity rights, the Gambling Act 2003 forbids new casino applications, which makes current licence-holders effective monopolies. New market entrants would require a law change to open a new casino, and Morrison reckons such legislation would face a tortuous passage. "I'm not sure you'd get another casino agreed to by the Greens," he says.
Morrison is clear-headed on the value of keeping Auckland free of competitors. "We do believe a monopoly is important. That's why we've been prepared to contemplate this deal with the New Zealand Government . . . the main item is the extension of licence out to 2048," he says.
He is also well aware of developments in Sydney, where a billion-dollar battle between rival casino operators has cast the value of licences and exclusivity into stark light.
Gambling magnate James Packer announced this year he planned to move into Sydney with a A$1 billion (NZ$1.15b) high-roller complex when incumbent operator Echo's exclusivity for its Star casino lapses in 2019.
Echo had paid A$700m in today's dollars to secure a 99-year licence expiring in 2093, and a further A$100m for the 12-year exclusivity period nearing its end.
In response to Packer's moves, Echo announced a A$1b development of its own, including offering the New South Wales Government A$250m for another 12 years of monopoly.
The state government turned down that deal - and the A$250m cheque - preferring Packer's guarantee of an extra $1b in tax revenue over 15 years.
Morrison says locking in the licence extension in Auckland was important to avoid a Sydney-style casino war.
By extrapolating the price of licences and extensions paid by Echo, reduced proportionally to reflect the extra revenue the Star Casino generates, SkyCity's licence extension and continued monopoly could have been worth up to $265m. The same comparison on a proportional basis with Melbourne's Crown casino, where competition has yet to devolve into an expensive bidding war, suggests a figure of $200m.
Labour MP Trevor Mallard says the licence value should have been further analysed before the deal was signed. "You don't have to be an expert to know that an extension for that length of time - effectively free and without being commercially tested - has to be of enormous value."
But Joyce stands behind the valuation. " If the agreement had not gone ahead, SkyCity's renewal in 2021 would have cost it very little. The $75m value was calculated for the Crown by an independent financial analyst estimating the expected value loss to SkyCity if the licence were not renewed in 2021, and balancing that against the small probability the licence would not be renewed under the 2003 Gambling Act."
A SkyCity spokesman says: "The value of the licence component of the deal reflected the fact it was for an ‘early renewal' of the licence and all parties agreed that the likelihood of the licence not being renewed was at most 5-10 per cent."
Morningstar senior equities analyst Nachi Moghe says valuing the licence extension is tricky, but comparisons with Australia were clearly towards and above the top end of KordaMentha's estimates.
"The licence is an intangible asset that isn't reflected on the balance sheet," he says. The only way for competitors to move into Auckland would be taking over SkyCity, and the extension will be added to the value of the existing licence and factored into its share price, Moghe says.
The convention-centre deal, and a similar arrangement in Adelaide, where a convention centre is being built in return for valuable concessions - notably, a 20-year exclusivity extension - are positive for SkyCity and its shareholders, he says.
That deal, in which SkyCity agrees to a rise in gaming taxes and will pay the South Australian Government A$20m, was ratified this week.
"Both the Adelaide and Auckland deals are value-creative, in my view. I see the share price going up," Moghe says.
It is hard to dispute Morrison's original bluff paid off.
He sometimes gambles himself, though the former accountant knows the odds are stacked. He admits to occasionally playing the pokies and roulette at rival casinos (he is not allowed to gamble in his own). "I'm a bit of a mug punter, like that."
NOD FOR ADELAIDE EXPANSION
South Australia's parliament has passed legislation allowing Auckland-based casino operator SkyCity to extend and upgrade the Adelaide Casino.
SkyCity Entertainment Group announced in December that it had reached agreement over the development after 2 years of negotiations, subject to approvals.
The agreement "levels the playing field with our regional competitors", chief executive Nigel Morrison said at the time.
Yesterday, South Australia's legislators passed the Statute Amendment (Gambling Reform) Act, allowing SkyCity a 20-year extension to its exclusive licence for the Adelaide Casino to 2035, the introduction of cashless gaming, lower taxes on VIP gambling, and an increase in the number of poker machines and gaming tables.
"SkyCity will invest over A$300 million (NZ$344m) to transform the Adelaide Casino into a world-class integrated entertainment complex, which will include Adelaide's first six-star boutique hotel, celebrity and signature restaurants, world-class VIP gaming experiences . . . all as part of the new entertainment precinct on the banks of the River Torrens," Morrison said.
These kinds of integrated entertainment complexes were vital to attracting high-end Asian tourists, he said. "Our development will help South Australia attract a greater share of this lucrative . . . market."
The deal would create jobs and economic growth and complement the redeveloped Adelaide Oval and the new and expanded Adelaide Convention Centre, Morrison said.
- © Fairfax NZ News