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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Two words - Synergies and redevelopment
ReplyDeleteYeah, I indicated that above but the 15% net rate of return is supposed to be at time of purchase not after millions more is spent on the asset to get you there.
ReplyDeleteIf it doesn't fit your criteria, return the moola that is burning a hole in your wallet to shareholders.