Crown Casino Group (ASX: CWN) last week won the right to progress to the third and final stage of discussions toward being granted a licence for a new Sydney Casino in 2019, when Echo Entertainment's (ASX: EGP) exclusive licence expires. Since the announcement, Echo's share price has dropped 7%, while Crown's has increased by 5%. The drop has been due to concerns that any new Crown-owned casino will significantly reduce gaming revenue at Echo's existing Star Casino.
Crown Casino's CEO James Packer stoked concerns further over the weekend. Speaking from Tel Aviv, Mr Packer confirmed reports that the local gaming market may contribute up to 50% of the new casino's earnings, saying "I think that the analysts are probably pretty right when they say VIP and premium local gaming are going to be similar contributors to the EBITDA of the property once the property is open".
The concerns over the effect on Echo appear to be well-founded, with reports that the VIP clients targeted by Crown will have minimum bets of $20, $25 and $30 for blackjack, roulette, and baccarat respectively. The low bets have led some to consider the Crown casino as a "full-blown casino, not a VIP-only facility", The Australian reported. Interestingly, the proposed casino will allow smoking in all 20,000 square meters of VIP gaming areas.
Additionally, Mr Packer took aim at the apparent poor management of Echo's Queensland casinos in Brisbane, the Gold Coast, and Townsville. Mr Packer was scathing, saying "I think Echo have done a terrible job, a terrible job. I think the quality of the properties in Surfers Paradise and Brisbane [is] a disgrace". The attention on Brisbane is primarily due to recent local interest in renewing the George Street precinct by introducing a new multipurpose entertainment facility potentially incorporating a casino and hotel. Echo has previously stated that it plans to spend up to $1 billion on a new location for its Treasury Casino.
A team of Crown executives are expected to travel to Brisbane in the next week to survey potential sites. The favoured location for both Echo and Crown appears to be on William St in the CBD, with the Newman Queensland Government due to complete a review on the future use of the site in September.
Foolish takeaway
Echo has suffered a setback by losing its exclusive casino licence in Sydney from 2019. The new Sydney Crown casino aims to target Echo's premium local clientele, which may meaningfully reduce earnings from 2019 onwards.
An additional threat to Echo is the potential for Crown to challenge the exclusive licences held in Queensland. The loss would result in significant downward pressure on the Echo share price, however any decision is some way off and the Crown casino has yet to agree to terms with the NSW government which may limit the effect on Echo's earnings. Echo and Crown represent good long-term buys, with both holding exclusive licences in capital cities and generating free cash flow which can be deployed to upgrading or building new facilities.
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Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.
