Keep Your Friends Close And Your Enemies Closer: Packers Make A Cunning Play In Macau

The Age

Wednesday November 17, 2004

STEPHEN BARTHOLOMEUSZ

As Macau becomes the Las Vegas of the East, the Packers are dealing themselves in.

THE Packer family's Publishing and Broadcasting Ltd has taken a typically cautious and quite clever first step into the Asian gaming sector by joining forces with the legendary Stanley Ho to enter his Macau stronghold.

With the support of the Chinese Government, the gaming sector in Macau is exploding. After China regained control of the former Portuguese colony in 1999, the new government decided to end Ho's four-decade gambling monopoly.

Wynn Resorts, controlled by former Las Vegas casino heavyweight Steve Wynn, received a licence, as did a Hong Kong-controlled operator, Galaxy, which includes another US player, Sheldon Adelson's Las Vegas Sands. Kirk Kerkorian's MGM-Mirage also plans to build a casino in Macau after negotiating a sub-licence from Ho.

Macau is the closest legal gambling destination for the Chinese and Taiwanese. Until the new licences were granted, however, it was regarded as a down-market destination. Now it promises to become the Las Vegas of the East.

For the Packers, whose Crown casino has dominated the Asian high-roller market in this region, the dramatic move up-market by the Macau gaming sector is both a threat and an opportunity.

The high rollers represent less than 20 per cent of Crown's turnover and a smaller proportion of its newly acquired Burswood casino in Western Australia, but is a highly lucrative element of its business. If Macau takes off as a destination for high rollers, as expected, PBL could expect to see some diversion of its Asian gambler base.

Alternatively, PBL would know as much, if not more, about tapping into the high-roller end of the Asian gambling market as any casino operator in the world. The eruption of activity in Macau should expand the regional gambling pie and therefore Macau also represents an opportunity for the Packers to leverage off their Australian casinos - where there is little scope for further expansion - and extend their influence into the region.

It might have been possible for PBL to go it alone in Macau by acquiring a sub-concession from one of the licence holders. The strategy it has adopted, whether by preference or because it couldn't acquire a sub-licence is, however, in keeping with the way the Packers enter new markets. They opted to go into partnership with Ho and bring together the influence of the two most established businesses in the region.

By pairing with Ho, PBL turns an otherwise fierce and dominant competitor into an ally. It will be able to share the costs and risks of its offshore expansion (the Packers' record in forays offshore is quite mixed) and leverage off Ho's formidable local experience and contacts.

The cost is, in the context of PBL's pristine balance sheet and substantial cash flows, modest. PBL will contribute only $211 million to the joint venture.

That will buy it an effective 28 per cent interest in the Park Hyatt hotel and casino complex being developed by Ho in Macau, a complex PBL described as "six star" and therefore one that sits easily alongside Crown and its preferred gaming customer base.

The Macau complex is quite big, with a 221-room hotel and 35 suites and a gaming area that will contain about 200 tables and 1300 slot machines. That would make it about 60 per cent the size of Crown.

Just as a rationale for the Burswood acquisition was to network the WA casino's high-roller business with Crown's - high rollers tend not to be single-destination players and Burswood offered PBL an opportunity to retain more of their business - there will be some packaging opportunities for PBL from its interest in the Macau complex.

Similarly, the pooling of Crown's $18 billion to $19 billion of high-roller turnover with Burswood's $4 billion is expected to reduce the overall volatility of the businesses, bringing win rates closer to their theoretical outcomes and allowing Burswood to lift the limits it was forced to impose because of the excessive volatility and risk generated by a small pool.

The interest in Macau will help the overall profile of PBL's gaming interests, as well as adding geographic and regulatory diversity to its portfolio.

The $211 million it will invest ensures that PBL will hold 40 per cent, to Ho's 60 per cent, of any future gaming businesses either develops in greater China, while the percentages will be reversed (PBL 60 per cent, Ho 40 per cent) for any expansion elsewhere in Asia. Singapore, Taiwan and Thailand have expressed interest in developing regulated gambling sectors. The different percentages tend to reflect the expertise and acceptability of the partners in different parts of Asia.

Ho, a somewhat controversial figure throughout his lengthy and colourful dominance of Macau's economy, is deeply connected in greater China, while PBL probably provides a better sponsor for entree to South-East Asia.

Asia now appears to be the focus for expansion of PBL's gambling interests offshore. That expansion is likely to be measured, given the slow pace at which the market is opening up.

Separately, through their privately held Consolidated Press, the Packers have a joint venture in Britain with Aspinall and hope to participate in the expected deregulation of the British gambling market next year.

The terms of that deregulation have yet to be finalised, with legislation still wending its way through the British Parliament. For the moment at least, it appears the family don't plan to pursue their ambitions in Britain through PBL.

bartho@theage.com.au

© 2004 The Age

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