Thursday, June 21, 2007

Sky City Entertainment Group Ltd: Underperforming

The recent announcement by the CEO of Sky City Entertainment Group Ltd [SKC.NZX], Evan Davies, that management will be looking over "underperforming assets" leaves more questions to ask than it answers.

Decisions

The timing of management for a reassessment of underperforming assets must be questioned.

Indicators that various units of Sky City's business were not cutting the mustard were obvious years ago.

The Sky City Cinema division is the most glaring example of the inability of management to move on from a dumb decision. Even at the time of purchase of the cinemas, it was obvious that they were never going to perform ,even for a moderate return on capital.

Intense competition from other cinema chains and other forms of media coupled with the high capital expense of continued new technology and the roll-out of more screens, made this purchase one of the worst of its time by any company listed on the NZX.

Management ignored these basic facts and shareholders pleas to cut it loose.

Queenstown Casino

For the life of me I cannot understand the rationale of management in keeping an asset that has never returned wealth to shareholders and has yet to make a profit. It appears to this writer that the status of a casino in the prestigious Queenstown tourist mecca and competition with Skylines outlet there(SKCs partner in the Christchurch Casino) is much more important than making a return on capital. Let Barry Thomas have Queenstown, it will never bring much to the bottom line even if the other casino left town.


Adelaide Casino

The Adelaide Casino has much going for it but it is taking far too long for it to deliver an acceptable return to its owners.

There has been much shareholder money pumped into this gaming den and they have been waiting patiently for the cherries to come up in a set of three. So far only 2 keep appearing.

It doesn't look like management can turn this one around. They have been given ample time and money but still keep shareholders with baited breath that spending millions more on this or that improvement will get more punters in the door and spending. It clearly isn't going to work any time soon.

Why now? Timing.

The most curious question left unanswered is that why, after many long years do Evan Davies and management see fit to look at these and other assets again with a view to remove them perhaps from the Sky City portfolio?

Pressure from shareholders hasn't worked in the past. I'm postulating here that Davies has been pressured by the more astute members of the board to do the honest thing and face up to the reality that some of Sky City's assets just do not belong alongside the good ones : Auckland, Hamilton, Darwin and Christchurch Casinos.

I'm guessing that Davies was given an ultimatum, that he either do something and get rid of the losers or ending up being cut himself.

If Davies only listens to board members and not shareholders do they deserve his leadership at the helm?

The question shareholders must ask themselves is, do we still want Evan Davies as our chief decision maker or do we need to put Sky City in the hands of a CEO who can make decisions, when it is appropriate and timely to do so.

What now? Proceeds of a sell-off

Shareholders have seen the Sky City share price become stagnant over the last 4 years, that is because the market hasn't had confidence in management to do the right thing with the assets and shareholders capital that they have at their disposal.

It is clear that high interest rates and business costs have continued to rise across the entertainment sector and other areas of the economy and Sky City Management have racked up over $NZ 1B of debt with some of the recent acquisitions that they have made on behalf of owners.

The proceeds of a sale of Queenstown Casino, a 40% share of Christchurch Casino(this writer doesn't believe it should be sold)Sky City Cinemas and Adelaide Casino seem to start at around $NZ 600M or there abouts.

75% of the proceeds $450M must go towards paying down debt but the rest $150M must be returned to shareholders via a capital return in the form of a special dividend. Shareholders need some payback for years of average returns.

To leave the proceeds of a asset sale in current managements hands will only encourage another burning hole in the pocket approach to investing and that is the last thing that Sky City needs for a good long term future.

A question still remains.

Who is Evan Davies successor and why isn't he in his chair?


Disc: I own SKC shares in the Share Investor Portfolio


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