Crown Resorts Limited (BX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Crown Resorts conference call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Steve McCann, CEO of Crown Resorts. Please go ahead.

Good morning, and thank you to those who've joined the call given the very short notice. I'd like to start by acknowledging the traditional custodians of the land on which our resorts are located. And I pay my respect to elders past, present and emerging and also extend this respect to any Aboriginal and Torres Strait Islander people who may be listening. This morning, as hopefully you will have seen, we announced that following completion of due diligence and negotiations in relation to binding documentation, Crown has entered into a scheme implementation deed, under which a company controlled by funds managed and advised by Blackstone has agreed to acquire all of the shares in Crown by way of a scheme of arrangement for $13.10 cash per share, subject to certain conditions. The Board of Crown has considered the transaction and unanimously recommends the proposal in the absence of a superior proposal and subject to an independent expert concluding that the transaction is in the best interest of shareholders. We think this is a good outcome for shareholders. Crown has made good progress in addressing a number of significant challenges and issues emerging from the COVID-19 pandemic and the various regulatory processes. Nevertheless, uncertainty does remain. And having regard to those circumstances and the underlying value of Crown, we believe a cash price of $13.10 per share represents a compelling offer for shareholders to consider. As you're all aware, it's been a long process to get to this point with Blackstone first indicating their interest in acquiring the company last March at an initial price of $11.85. The price of $13.10 is 11% higher than the initial offer, representing an increase in equity value of over $840 million. And it's also a premium of over 30% to Crown's share price prior to receiving the last acquisition proposal in November of $12.50. The Crown Board has consistently stated that it is committed to maximizing value for Crown shareholders, and we believe this outcome is aligned with the Board's strategy. Whilst there is still a number of conditions that must be satisfied before a deal can be completed, the Board considers that it's now appropriate that the Blackstone offer is put to Crown shareholders for their consideration, which we're targeting to occur in the second quarter of this calendar year. Full details of the agreement with Blackstone are set out in the implementation deed, a copy of which is attached to our ASX announcement this morning. I'd like to just briefly touch on some of the key terms now. The transaction remains subject to various conditions including an independent expert concluding and continuing to conclude that the scheme is in the best interest of Crown shareholders, third approval, approval from Crown's various gaming regulators and certain agreed gaming regulatory events in respect of Crown's key licenses in Victoria, Western Australia and New South Wales having not occurred, no material adverse change having occurred and some other customary conditions. Blackstone's already lodged applications with FIRB and the various state gaming regulators for their required approvals. Nevertheless, the timing of these approvals will be a key determinant in the timetable for the transaction from here. As part of the implementation of deed, we've agreed to customary deal protections for Blackstone including no shop, no talk and no due diligence obligations as well as other protections such as notification obligations and matching rights in the event of a competing proposal. In the event the deal does not proceed, the implementation deed sets out the circumstances in which a break fee would be payable to Blackstone or a reverse break fee payable to Crown, both of which were around $90 million or 1% of the equity value. Looking ahead to the next steps, Crown intends to send a scheme booklet to Crown shareholders in March or April 2022. The scheme booklet will contain information relating to the scheme of arrangement. It will also contain an independent expert's report from Grant Samuel on whether the scheme of arrangement is in the best interest of Crown shareholders. Subject to the expected timing of regulatory approvals, a scheme meeting is expected to be held in the second quarter of calendar year 2022. And if approved, the scheme would be implemented shortly thereafter. In closing, Crown believes the offer is compelling for our shareholders to consider. The price appropriately reflects the value of Crown's world-class assets and global reputation for premium service and experiences. The agreement with Blackstone also highlights the strength of the Crown brand and confidence in our future as we emerge from some challenging times, which is welcome news for our people, our customers and our stakeholders. We'll be speaking with you again on Thursday following the release of our first half result, where we can provide you with an update on our trading performance and financial position. At this time, we're happy to take any questions you might have on this morning's announcement. So with that, I'll hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from Sacha Krien with Evans & Partners.

Stephen, just wondering if you've had any indication from the Victorian government or the Victorian regulator on how respective they are to a change in ownership in light of the special management process that's going to be in place for a couple of years.

So as I flagged the -- and set out in the scheme implementation deed fairly clearly, there is a requirement for regulatory approval, which we don't yet have confirmation of. That said, we do understand quite a bit of work has been done by Blackstone. They've had discussions over a significant period of time with the various regulators, so we're not aware of any concerns. But there is a process still to go through which will also include tabling the actual terms of the transaction itself that each of the state-based regulators will need to be comfortable with. So that's a process that Blackstone will work through from now.

Yes. I guess there's risk of timing on that. I mean we've seen in the past that regulatory approval has taken some time in some states. And then we are still waiting in New South Wales around the gaming launch with Sydney. You have said pretty clearly it is subject to that, so you've answered that. I guess my second question is just in terms of the AUSTRAC investigation outcome, I haven't been through the data, yes. But is that effectively covered by the material adverse change clause?

The material adverse change clause is a fairly normal clause in its construct. There are -- for the material adverse change clause to be triggered, there needs to be something that occurs prior to the transaction closing which would potentially or which would have a reasonably likely impact on the value of Crown. And within that, and that includes a diminution in the value of consolidated net assets by at least $750 million, so that's all set out in the SID. So -- and AUSTRAC outcome or another -- some other penalty outcome would be incorporated within that material adverse change assessment.

Your next question comes from Larry Gandler with Credit Suisse.

Steve, you're concluding that the Blackstone proposal values Crown fairly. Just wondering sort of what approaches have you taken to arrive at the company's valuation and to what extent has sort of the regulatory inquest and COVID maybe created some conservatism in your own approach.

So at a high level, the answer to that question is we've obviously done quite a bit of work with the Crown Board going through an assessment of our view on value with assistance from external advisers. That's a process that is fairly normal but has obviously been intensified for some period given that the first approach was almost 12 months ago now. So we've been through a number of updates on our financial outlook having regard to current circumstances and current trading performance, current liquidity, et cetera, but also having regard to our assessment of what we believe the maintainable earnings of Crown are expected to be post a recovery from COVID and post a scenario where we're fully up and running in all of our results. So we've had regard to that longer-term outlook. Clearly, when you're looking at the change of control, it's not today's trading price and today's earnings that are a sole determinant of that. It's a much broader assessment. So we've been pretty rigorous in that analysis, I think, and have -- and we've formed a view that having regard to all of that, this is a fair price. Now of course, that the recommendation from the directors is a unanimous recommendation that we do think that this represents compelling value for shareholders to consider, but it is still subject to an independent expert forming a view that it's in the best interest of shareholders.

[Operator Instructions] Your next question comes from [ Stephen Wayman ] with [ Morgans ].

I was wondering if there's any terms in the deal in regards to the subordinated notes that are an issue that prevent you from redeeming them or allow you to redeem them.

So we've set out in the scheme implementation deed what happens from here in terms of the way the transaction will progress. There are also some clauses there in relation to the conduct of business. We'll be obviously in discussions with Blackstone on some of those things, but we are not intending to make any material change to our debt structure during the course of this process. Clearly, Blackstone, in the event of a transaction being completed, would have their own strategy around refinancing of our debt, so we're not intending to make any material changes in the interim.

Thank you. There are no further questions at this time. I'll now hand back to Mr. McCann for closing remarks.

Okay. Thank you, everybody, for attending, as I said, at short notice. And we will be obviously fielding calls and trying to clarify any further questions that you may have. And we also have our results announced for our half year results on Thursday morning, so we'll give you an update on trading performance and field any further questions that you may have at that point in relation to the transaction. So thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.