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Is Echo a buy?

News that Genting Hong Kong has increased its stake in Echo Entertainment (ASX:EGP) could be a pre-emptive move to gain control of Sydney’s Star Casino.

Genting HKG purchased an additional 11.4 million shares in Echo last week, taking its stake to 6.6%. Genting has applied to regulators to increase its stake to 25%, but has yet to receive approval. The move comes as James Packer’s Crown Limited (ASX:CWN) sold out of its 10% stake in May.

Genting is part of the Malaysian Genting Group, controlled by billionaire K.T. Lim, and is expanding aggressively worldwide, with a new resort being built in the Bahamas later this year, and another in Florida, US.

Apart from The Star casino in Sydney, Echo also owns Jupiters casinos on the Gold Coast and Townsville as well as The Treasury casino in Brisbane. Any or all of those assets may be attractive to Genting, and recent falls in the Australian dollar will make buying these assets cheaper for Genting. The company would need to wait for approval before taking its stake beyond 10%, but we could see Genting slowly increase its stake up to that limit.

With the exit of Crown from Echo’s share register, Echo’s share have plunged 13% in just the last month, compared to the S&P / ASX 200 Index’ (Index:^AXJO) (ASX:XJO) drop of 7%. That could also make the company more attractive to Genting. But Echo still looks expensive, trading on a prospective P/E ratio of over 18 times, while paying a miserly dividend yield of less than 2%.

Of course, Echo is still trying to fend off Crown’s plans for a high roller casino at Barangaroo, on Sydney’s foreshore, where Crown is building a six-star hotel complex. While Echo holds the exclusive licence for a casino in Sydney until 2019, Crown has applied to the NSW government for a VIP, invitation-only gaming facility. That could take a big chunk of revenue from The Star if approved.

As part of its defence, Echo has applied to extend its casino licence while committing to spend $1 billion expanding its investment in The Star and the surrounding area.

Foolish takeaway

Investors probably wouldn’t want to bet against Packer getting his way, and Genting has several large hurdles to overcome if it wants to take control of Echo. Add in Echo shares looking expensive and Foolish investors might want to give the company a miss for now.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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