AVCJ Awards 2022: Deal of the Year – Large Cap: Crown Resorts
Crown Resorts represented a daunting target, given its size and pandemic and regulatory-related challenges. The Blackstone Group drew on its global know-how to make the USD 8.1bn deal work
The Blackstone Group has rich experience in turning around hospitality and leisure assets. Hilton Worldwide evolved from mediocre performer to outperformer, doubling in size during an 11-year holding period. The Cosmopolitan in Las Vegas went from foreclosure to USD 5.65bn trade sale in eight years, helped by the private equity firm’s capital, renovations, and operational improvements.
“Each experience reinforced the importance of close and open communication with our stakeholders – our success was only made possible because we had the support of employees, regulators, investors, and other stakeholders,” said Alan Miyasaki, Blackstone’s head of real estate acquisition in Asia.
This gave the private equity a degree of conviction in taking on Australia-based resort and casino operator Crown Resorts in June 2022, following a year-long pursuit. Still, there were plenty of complications, with Miyasaki noting that the company was undergoing “a large-scale, high-profile regulatory investigation, unlike anything we’ve seen in the region.”
A troubled asset
With an enterprise value of AUD 11.3bn (USD 8.1bn), it was at the time Blackstone’s largest investment in Asia Pacific, and it remains the largest sponsor-backed take-private completed in Australia. The deal also stands as a testament to private equity’s ability to take a long view, looking beyond pandemic and regulatory-driven strictures and recognising transformational potential.
Crown owns various casinos, hotels, and restaurants, though it is best known for three properties in Melbourne, Perth, and Sydney that comprise over 3,000 hotel rooms and 6,000 gaming tables and machines. It is the sole casino license holder in Melbourne and Perth and one of only two in Sydney.
The company’s problems began in 2020 with COVID-19 lockdowns eating into revenue and Austrac, a national financial crimes agency, launching an investigation into possible breaches of anti-money laundering and counterterrorism financing rules. This was tied to VIP gamblers brought in by junket operators in China, prompting Crown to say it would cease dealing with junket operators.
It didn’t end there. After gaming authorities in New South Wales decreed that the Sydney casino wasn’t fit to retain its license, class action lawsuits and state investigations related to money laundering allegations were launched in Victoria and Western Australia.
Crown’s revenue for the 12 months ended June 2021 declined 31.3% year-on-year and EBITDA slid by 77.4%. Meanwhile, a net profit of AUD 81.9m in 2020 became a net loss of AUD 261.6m in 2021.
Blackstone acquired a 9.99% stake in the company in early 2020, taking advantage of market volatility while recognising the quality of the underlying asset. The private equity firm tabled its first take-private offer in March 2021. This was rejected, but it put Crown into play. Over the next six months, Blackstone submitted an improved offer, while Star Entertainment Group, another Australia-listed gaming business, proposed a merger and Oaktree Capital Management put forward a structured solution.
None of the bidders made progress until Blackstone returned to the fray in November 2021 with an offer that ultimately won board endorsement three months later. Closing coincided with the New South Wales gaming license being restored. Regulators in Victoria and Western Australia had already decided not to act, arguing that doing so would damage their economies.
This followed a resolution of various legal issues. In October 2021, Crown settled a class-action lawsuit filed in federal court, without admission of liability, by agreeing to pay AUD 125m.
“We were obviously aware of the regulatory risks facing the business. Our view was that Blackstone’s stewardship of these marquee assets could see Crown realise its full potential, and a key component would be working with regulators in respect of the issues faced by the business,” said Miyasaki, citing the firm’s experiences in other markets and its resources in Australia.
The private equity firm claims to have spent 18 months – it started after making the initial investment in 2020 – positioning itself as a credible counterparty in the eyes of stakeholders including regulators and unions. Various regulatory and licensing approvals were obtained during this period.
Looking forward
The deal, for which the equity purchase price was AUD 8.9bn, featured a AUD 5.4bn unitranche facility from real estate investor Starwood Capital Group and debt funds affiliated to Blackstone. The use of real estate-backed financing emphasises the hybrid nature of the deal, with the firm’s private equity and real estate teams working in tandem.
Miyasaki noted that collaboration across strategies and geographies is relatively common; Blackstone’s portfolio operations team is also involved in Crown. “Running an integrated resort involves many different aspects – from managing properties to overseeing all the various layers of the operating business,” he added.
Having secured the gaming licenses, Blackstone moved to deploy the capital and resources required to reinvigorate the business. It has also strengthened Crown’s leadership, with 10 key hires made to date, pending regulatory approvals. They include a CEO who has 30 years of industry experience, latterly heading up Wynn Macau, and a chairman who previously served as CEO The Cosmopolitan.
Crown’s compliance and corporate affairs capabilities are being built out as well, with a focus on ensuring productive working relationships with regulators, legislators, and government officials.
“Our focus is also on the non-gaming aspects of the business including the food and beverage offerings and live entertainment,” Miyasaki said. “We want to continue to enhance the integrated resorts experience and provide a diverse offering, which makes the Crown properties a place where both Australians and international guests want to be.”
There is an acceptance that gaming investments everywhere face tighter regulatory scrutiny to ensure operators promote a safe and responsible gaming environment. At the same time, Crown attracts attention as a key source of employment – the company has 32,000 staff nationwide and is the largest single-site employer in Melbourne – and a recognisable brand.
As such, efforts to work with the company and assorted stakeholders on remediation are ongoing. “We’re proud of what we’ve been able to accomplish, but we know that we still have a lot more work to do,” Miyasaki observed.
Pictured: The Blackstone Group's Alan Miyasaki collects the award for Deal of the Year - Large Cap
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