Failed Sky City bid for Christchurch Casino good news for Shareholders

The refusal from Skyline Enterprises Ltd [SKYLINE] of a bid for their 50% share in the Christchurch Casino from Sky City Entertainment Group Ltd [SKC.NZX] is good news for Sky City investors.

This is why.

Sky City has a stated criteria that current investments and asset purchases must meet a return that nets 15% or more. Much of their current business overall meets that criteria. The total purchase cost for 100% the Christchurch Casino has been conservatively estimated by me at around NZ$250 million and last years $6.9 million net profit for the 50% of the casino that Sky City owns would extrapolate into a total of $13.8 million or a 5.5% net return.*

This figure would be lower than the cost of financing such a deal.

I am puzzled that the company would make such a move** considering it doesn't meet their investment criteria. I can only assume that owning the Christchurch Casino outright would have enabled to develop and grow the property to perhaps eventually meet that criteria but eventually is not the same as its current return.

Clearly Skyline want more for the casino or just see it as a good investment in the pool of assets that currently makes up its business. Skyline own the business from a much lower entry cost than Sky City so the returns for their share of the casino would be much higher than what Sky City get for theirs, so the cost Sky City would have to pay if they wanted to make a successful bid would have to be way over the reported $100-110 million that they made last week.

A lucky escape thus far.

Footnote

*These figures differ from those that I used in my previous post about this topic. The $6.9 million figure in the previous post I stated was an Editda figure and took my estimates from that. In the 2010 Annual Shareholder Review it states it as Editda but Nigel Morrison tells me it is NPAT.

The shareholding I stated in the previous post was also incorrect. It is 50% and not 54.3% as I stated. The confusion comes in through various different tranches of Christchurch Casino shares purchased at 3 different times, the latest being in October 2010. One purchase included a rather complicated transaction where both Skyline and Sky City bought equal shares from a joint partnership in a hotel.

**I was so curious as to why SKC made this bid that didn't meet their investment criteria that I contacted SKC CEO Nigel Morrison earlier this week and including him putting me straight about my estimated figures based on incomplete data from their 2010 Annual Reports he had this to say in relation to a question to him as to whether the company would up the price for their initial bid.

"I can't comment any further other than to say we are confident that any such investment would realize our stated investment hurdle rate."


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c Share Investor 2010

Sky City Entertainment Group Ltd: Christchurch Casino purchase would fall short of company investment criteria

An update at the bottom of this post, originally made yesterday, confirms a bid was made by SKC and rejected by Skyline.

A whisper out yesterday that Sky City Entertainment Group Ltd [SKC.NZX] looks set to buy up the half share in the Christchurch Casino they don't already own isn't news to me.

In a June 15 interview with SKC CEO Nigel Morrison he indicated that the company was interested in Australian casino assets should they fit their investment criteria and purchase price and he indicated the company had access to just over NZ $1 billion for any acquisition opportunities should they arise.

The Christchurch Casino was purchased by SKC in June 2004, off Aspinall (NZ) Limited, which held a 40.5% shareholding in Christchurch Casinos Limited. The purchase price was NZ$93.75 million and in October 2010 SKC bought an 8.6 % stake held by Invercargill businessman Louis Crimp's Southern Equities, to take their holding to near 50%. In 2008 SKC bought a 5.2% stake off their then business partner the Crowne Plaza Hotel, taking their ownership interest in Christchurch Casino to 45.7%. With the 8.6% stake then SKC control the company with a 54.3% stake.

The cost of the 8.6% stake is likely to be around the $20 million mark if the rumoured purchase price of $100-110 million for the remaining 47.5% stake in the Christchurch Casino is accurate (it says 50% in the article but this is incorrect) and by the same rationale the 5.2% stake would be worth around $14 million.

This puts the purchase value of first 54.3% share of the combined stake of Southern Equities and Aspinall at around $128 million, so the rumoured $120 million max for the remaining 47.5% stake that Skyline Enterprises [SKYLINE] holds looks good value by comparison.

Sky City management have a set investment criteria when assessing an asset purchase or business. It must return a net income on investment of at least 15% before shareholder moola is plunked down on the table.

Would the Christchurch Casino purchase meet that criteria?

Editda for FY 2010 for Christchurch was $6.89 million for their at the time 45.7% stake so with a full 100% stake the Editda would be around $15 million. Take out a 35% cut for income and other taxes and expenses and the Net Profit for a 100% stake is around $10 million.

With a combined estimated purchased price for the whole casino at around $250 million a $10 million net profit is a 4% net return on the purchase price.

Some of my figures are of course ball-park guesstimates based on some raw available data but I think they are roughly in the pitch.

My question to Nigel would be, if you are buying the rest of the Christchurch Casino, why are you not sticking to your stated investment criteria?


Disclosure: I own SKC shares in the Share Investor Portfolio

UPDATE - 10/11/10

SKYCITY is aware that there has been discussion and uncertainty as to whether it has made a proposal to Skyline Enterprises to acquire the 50% interest in Christchurch Casino which SKYCITY does not hold.

SKYCITY wishes to confirm that it has advised Skyline Enterprises of a cash offer that it is willing to make for its interest in Christchurch Casino.

The Board of Skyline Enterprises has rejected SKYCITY's approach.

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c Share Investor 2010

Sky City Assets: Buy, sell and hold

News out today that Sky City Entertainment[SKC.NZ] has sold a share in a the Christchurch Crowne Plaza Hotel and in turn received a larger stake in the Christchurch Casino that it owns with Skyline Enterprizes and cash in hand leaves this shareholder a happy man.

It adds to the news yesterday that the casino company will develop a "luxury resort" on the Little Mindal land it owns in front of the Darwin Casino.

The larger stake in the CHCH Casino takes the Sky City holding from 41% to a 46% holding.

The hotel was sold for $61.5 million, so one might presume that the Sky City share of the booty was $30.75 million. There was no breakdown of how much the extra 5% stake in the South Island Casino cost and therefore how much cash was left to disperse to debt pay downs or even a dividend to shareholders.

Shareholders in Sky City are entitled to know what the 5% cost.

The cash left over is more likely to be going towards subsidising Sky City Cinemas, a division that was on the block for a year but failed to sell as of last Friday because the buyer "failed to get financing", according to the Sky City Press release.

Any credible buyer interested in the cinema would only have to fork out about NZ$60 million and they would have known that was around the asking price when Sky City wrote down the assets of the division last year.

It is more likely that the deal fell through because the assets wouldn't have even got near the $60 million price tag rather than blaming the credit crunch for failing to sell a loss making business.

I'm naturally annoyed at management for not disposing with the cinemas, even for less than the asking price. It is going to be a continuing drain on capital expenditure and is never going to make any sort of decent return on assets or capital.

Cinemas as a business are on a par with the airline industry when it comes to losing money and track records for both show a history of company collapses, huge expense for owners and continued disappointment.

Nigel Morrison needs a boot in the head for that one.

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c Share Investor 2008