Wednesday, September 26, 2007

Sky City Entertainment Group Ltd: Premium for Control

Sky City Entertainment Group Ltd [SKC.NZX] the New Zealand based casino and cinema operator has been under speculation of a buyout for about a week now.

A name has finally hit the streets, albeit still unconfirmed, TPG Newbridge, one of the world's biggest private equity funds, with links to Sky City's former operator the casino giant Harrahs.

TPG is in the process of tying up a deal to buy the casino group Harrahs and has also been busy buying up casinos around the world.

Owen Blicksilver, a New York- based TPG spokesman, said that the company would not comment on whether it was considering a buyout of Sky City, which he termed "market speculation".

My only consideration, should this speculation have wings, is the price TPG or any other suitor should pay.

Over the 10 years that I have been invested in the New Zealand Stockmarket, many companies have been bought by foreign buyers and usually at a very cheap price in comparison to similar companies and the sectors that they operate in overseas.

Premiums paid for control of good companies haven't been sufficient but hapless management have fallen over to big incentives and short-sighted business plans. Share holders have simply folded their tent for a quick buck and run to the hills to count their beans.

Recently, the bid by MFS living and Leisure, an Australian Tourist operator, failed when it tried to make a cheap play for Tourism Holdings Ltd [THL.NZX] the New Zealand listed camper van and tourism owner.

Recent bids by Dubai Aerospace International and a Canadian pension fund bid for Auckland International Ltd [AIA.NZX] have come at the lower end of valuations for control of a strategic monopoly.

In 2005 Waste Management, a listed New Zealand trash monopoly, in which yours truly had a sizable stake, was flogged off by management after they had been given incentives by the bidder Transpacific Waste, from Australia.

The company went for a song and profits made by the new owner since would be more than reflected in a higher than sale price share price today had Waste Management still been listed.

In Sky City we have a multitude of assets. Auckland, Hamilton, Queenstown, Adelaide, Darwin casinos owned outright. Part interests in Christchurch and Dunedin Casinos and well over 100 cinema screens.

The company's Casinos in New Zealand are a virtual monopoly with no more likely to be built and the Darwin Casino likewise.

It is true enough that the assets are probably not performing as well as they could and the reasons for that are many and varied but they are exceptional assets when they are well managed.

I don't have much faith in the current board being able to efficiently identify company problems and act with speed and diligence to get the firm back on track. Last weeks debacle over the announcement of buyer interest in the group was another decision that was handled badly and reflects upon the board as such.

Monopolies such as Sky City Entertainment deserve a premium when sold and full control attracts a premium as well.

For this reason management must be urged to get a decent price for the company and not fall for the first attractive bidder with long eyelashes.

Simon Botherway from Brook Asset Management has 8 Million shares in SKC and he and his company has been active in holding out for more in buyouts of holdings that he has had in other company's.

Large institutions like his could press for more should there be a concrete offer made.

I'm hoping any low-ball bid by a potential suitor is going to make him and others very angry.

I will be.


Disc: I own SKC shares in the Share Investor Portfolio


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Discuss SKC @ Share Investor Forum
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Recommended Amazon Reading

The Intelligent Investor: The Definitive Book on Value Investing. A    Book of Practical Counsel (Revised Edition)
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
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