WYNN Wynn Resorts Ltd

By Mike Cherney in Sydney and Ese Erheriene in Hong Kong 

Wynn Resorts Ltd.'s $7.1 billion offer for Australia's Crown Resorts Ltd. would give the Las Vegas giant a foothold in more international markets, underscoring casino operators' efforts to expand beyond the traditional gambling hub of Macau to attract Asia's lucrative high-rollers.

Wynn currently runs casinos only in the U.S. and Macau, the semiautonomous Chinese city that is the epicenter of the global gambling industry. Analysts said entering the Australian market would complement Wynn's existing business, offering another option for the company's VIP customers as concerns persist that gambling spending in Macau could fall owing to a Chinese economic slowdown.

Macau casinos generate more than five times the annual revenue of those in Las Vegas. The contribution from high-rollers to global gambling sits at around 50%, according to data from Union Gaming, an investment bank focused on the gambling sector. That figure has trended lower since 2011, when VIP players accounted for roughly three-quarters of revenue.

A tie-up with Crown would give Wynn properties in Melbourne, Perth and London, plus a waterfront casino and hotel under development in Sydney that will cater to VIPs. Crown's properties offer high-quality, stable cash flows and, in Melbourne and Perth, have the added benefit of being a regulated monopoly, said Graeme Ferguson, an analyst at S&P Global Ratings.

"It's not surprising to see consolidation being considered by major players," Mr. Ferguson said. "Mergers have been happening in the past few years driven by slow growth and limited new development opportunities."

Wynn's offer, disclosed Tuesday morning Sydney time, values Crown at 14.75 Australian dollars (US$10.51) a share, a 26% premium over Monday's closing price. Crown shareholders would receive 50% of that amount in cash and 50% in Wynn shares. Discussions are at a preliminary stage and there is no certainty a deal will be reached, Crown said.

Crown shares jumped about 20% on Tuesday, closing at A$14.05.

Wynn confirmed in a regulatory filing that it is in preliminary discussions with Crown.

Wynn Resorts executives were surprised Crown had revealed that they were in talks, as Wynn hadn't been ready to do so, said a person familiar with the matter at subsidiary Wynn Macau.

Company founder Steve Wynn stepped down from Wynn Resorts last year after a Wall Street Journal investigation detailing sexual-misconduct allegations about him. An investigation by Massachusetts regulators revealed last week that Wynn executives ran a sophisticated coverup to protect Mr. Wynn from the allegations. Mr. Wynn has said the idea that he ever assaulted a woman was preposterous.

David Green, a former casino executive turned founder of Newpage Consulting, said a Crown deal would ensure Wynn is able to expand regardless of the outcome of regulatory proceedings in Massachusetts. Wynn plans to open a $2.6 billion resort there in June, but regulators are reviewing whether it is still suitable for the company to hold a license following the allegations against Mr. Wynn.

"Wynn are hedging their bets," Mr. Green said. The Crown deal would help the company "get a set of assets for not a huge premium."

China has been at the center of a broader boom in Australian tourism, which has also benefited casinos. Last year, China overtook New Zealand to become Australia's largest source of visitors, according to official data. Tourism Research Australia expects 11.9% annual growth in Chinese visitors over the next 10 years.

A deal for Crown, if it advances, still holds risks. Before Tuesday's announcement, Crown shares were down about 20% from their recent highs, reflecting concerns about main-floor gambling revenue, the company's efforts to rebuild its VIP business after employees in China were arrested and sentenced for gambling-related crimes, and the progress of the new developments in Australia.

In February, Crown Chief Financial Officer Kenneth Barton told investors on a conference call that high-end visitors to the company's Melbourne property were being cautious about spending. Overall, Crown said high-roller spending fell 12% in the six months ended in December.

"The people at the premium end have been still coming to the property in broadly the same numbers but spending less," Mr. Barton said, according to a transcript. "We've seen that also with our VIP customers at the top end as well. And anecdotally, we've seen casual restaurants do better than premium restaurants."

Still, some Wynn shareholders cheered the proposed deal. Trip Miller, managing partner of Gullane Capital Partners, which has 18% of its $70 million in assets invested in Wynn, said a move into Australia could serve as a steppingstone to Japan, which recently legalized casino gambling.

"Crown has a lot of cash and a pretty solid balance sheet and that would serve Wynn pretty well as they continue to grow," Mr. Miller said.

Crown's largest shareholder is an investment firm tied to billionaire James Packer that has a roughly 47% stake. In recent years, Mr. Packer has debated spinning off parts of the company or taking it private. Following the arrests of Crown's employees in China, the company sold off many of its overseas assets to focus on its Australian operations.

As the threat from online gambling has grown, some casino companies have shifted focus to travel destinations that are less reliant on gambling. Crown's Australian rival, Star Entertainment Group Ltd., is helping to build a casino and resort complex in Brisbane, which is about a 90-minute flight from Sydney.

Some bankers have said the casino industry is ripe for deal-making as casinos look to diversify their offerings, improve margins and lower costs. Just last month Delaware North Cos., based in Buffalo, N.Y., won regulatory approval to buy a casino in Darwin, in Australia's Northern Territory. And in February, The Wall Street Journal reported that billionaire activist investor Carl Icahn owned a stake in Caesars Entertainment Corp. and planned to push the casino operator to consider selling itself.

Write to Mike Cherney at mike.cherney@wsj.com and Ese Erheriene at ese.erheriene@wsj.com

(END) Dow Jones Newswires

April 09, 2019 09:13 ET (13:13 GMT)

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