Friday, April 24, 2009

Sky City CEO doubles down

The rationale for Sky City Entertainment [SKC.NZ] loading up the balance sheet with extra shares and as a consequence around NZ$230 million of cash isn't completely clear to me over the last few days since SKC were put on a trading halt on Tuesday 21.

My confusion is compounded by the fact that the $230 million raised appeared to be for two different reasons, for purchase opportunities and "strengthening the balance sheet" in uncertain times but if a purchase is made how does that strengthen the balance sheet? especially if it involves drawing down on the half a billion in unused credit facilities that Sky City currently has.

I am going try to unwind my confusion and explain my point of view on this subject in the following column.

This from a story in might give you an indication on where I might be heading:

But despite its $916 million of debt, SkyCity plans to put the money it raises in a bank deposit account, at least for now.

Chief executive Nigel Morrison said that was because SkyCity "owes no bankers anything."

Just one question though, if you have access to cash in the bank and a rather large debt hanging around your neck don't you pay some of it down?

Well, Nige did say when posted to his position as CEO last year that one of his main tasks would be to be prudent with shareholder funds:

"Our shareholders have made it clear to us that they want us to focus on maximising the performance of the assets we operate. This is what we will be doing. as we have said previously, we expect to achieve this within an 18-month time frame. We will retain tight control over capital and not expend capital unless we are very confident of healthy returns for shareholders".

The emphasis on unnecessary capital spending in addition to paying down debt has been made several times since then and one could be forgiven for thinking that this task was going to be paramount to everything else until performance at the company was "maximised".

That certainly of direction needed to be achieved as the company has floundered directionless over the last 5 years under the previous CEO Evan Davies.

Now of course Morrison does have to be fleet footed and have the ability to change tack as economic circumstances change but the clear direction that he outlined last year has forked out into another, possibly expensive direction:

"For anybody to suggest that the money it just going to sit on deposit in a bank account earning 3 per cent for three years, that's ludicrous," he said. "It's a position of strength. We're not beholden to any financier or any bank." Morrison said it also gave the company funding for acquisitions should opportunities arise. Full Story

Now I am not about to suggest that Morrison is going to plunder more shareholder money on overpriced assets as Evan Davies did, as his reputation for being a canny operator who rejuvenates casinos is well known but I get a little edgy when he is asking shareholders to put their hands in their pockets to buy more casino assets, even if they are as he said, now going for knocked down prices.

It is the move away from the previous stated 18 month aim of being financially prudent and rejigging the business that has me worried and to then focus on other plans that involve large capital expenditures would be a more realistic goal, especially as those casino assets he may now be talking about could be alot cheaper in 6 months time.

It seems to me that he may already have a target casino in mind.

Time to cross your fingers if you are a shareholder. I am.

Sky City @ Share Investor

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