Echo lodges alternative proposal

Echo and Crown stand to profit from a compromise for the future of Sydney's casinos.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published July 2, 2013 11:00 am AEST

Echo Entertainment Group (ASC: EGP) and Crown Group (ASX: CWN) have submitted their respective plans for the future of gambling in Sydney. James Packer's Crown Group submitted a plan involving the construction of a VIP-only casino as part of a proposed US$6 billion integrated hotel and resort precinct in Barangaroo area, just across the Harbour from Echo's Star casino at Pyrmont.

Unlike Crown, Echo has chosen to submit two proposals to the NSW panel. The preferred option for Echo is for an extension of the company's exclusive gaming licence for a further 19 years, until 2034, by developing the existing hotel, The Star.

The proposal is reported to be worth $1.1 billion and includes an investment of over $130 million to upgrade the precinct surrounding The Star casino, as well as a royalty fee of $250 million to the state government. "If approved, our plans will complete Sydney's new feature precinct, integrating Barangaroo, Darling Harbour and Pyrmont," Echo chairman John O'Neill stated.

The Echo proposal will increase the number of rooms at The Star by 500 to 1150 by building two new international hotels run by a premium Asian operator. Echo believes the improvements will result in a further 330,000 international and interstate visitors a year, a 1.2% increase for the state. Both proposals are attempting to lure wealthy tourists and high rollers from Asia, who have increasingly taken to gambling and holidaying in Macau and Singapore in recent years.

The alternative proposal submitted by Echo involves a compromise between the two. Echo will forego exclusivity and compromise with Crown by allowing the proposed Barangaroo Casino development to go ahead alongside The Star if the new casino is limited to VIP clients only. This would retain the mass-market gaming revenue dominated by Echo, which currently accounts for over 60% of earnings and allow the development cost savings to be diverted to the company's exclusive Queensland casino assets. In this scenario it's expected that The Star will be more slowly expanded by adding tables as demand requires.

Foolish takeaway

The proposals by Echo and Crown will result in a significant investment in the Pyrmont and Barangaroo precinct on the Sydney waterfront. The Echo proposal holds greater social appeal due to the upgrade of surrounded amenities, however the Crown proposal may appeal more to the Asian tourism dollars targeted by the NSW government.

Only time will tell, but it appears as though only Crown can lose in the current scenario, as Echo appears satisfied with either approach. Exposure to either company may provide solid returns for investors, as a lower Australian dollar will promote tourism to the country where both hold world-class gambling and hotel assets.

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Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.

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