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SkyCity draws an ace in Adelaide expansion

Auckland-based casino operator SkyCity Entertainment Group (ASX: SKC) has won a significant chance to grow revenues after it received the regulatory approval for its second big growth project in as many months, this time for a $300 million upgrade of its Adelaide Casino.

Legislation had to be passed by South Australia’s government to amend the State’s Gambling Reform Act, but the prize for SkyCity includes a 20-year extension to its exclusive gaming license out to 2035, the introduction of cashless gaming and ‘Ticket-in Ticket-out’ gaming, lower gaming tax rates for VIP gaming, more gaming machines to 1,500, an increase in the number of gaming tables to 200 and an option to substitute 15 tables for 300 automated table game terminals.

In exchange, SkyCity will invest $300 million to turn the Adelaide Casino into a “world-class integrated entertainment complex”. It will include Adelaide’s first six-star boutique hotel, celebrity restaurants and VIP gaming as part of a new entertainment precinct along the River Torrens.

It is a similar package to that planned by James Packer’s Crown (ASX: CWN), which will invest up to $1 billion to develop its own new entertainment precinct in Barangaroo on Sydney’s waterfront. Both developments are aiming to take advantage of demand from wealthy Asian gamblers and become local entertainment hubs. Crown won the go-ahead for its project over a rival bid from Echo Entertainment’s (ASX: EGP) The Star casino which now faces an uncertain future.

SkyCity’s win in Adelaide is in addition to recent approval from the New Zealand government to allow the company to invest $351 million to build a new National Convention Centre in Auckland. For that SkyCity will get a 27-year extension of its exclusive Auckland casino licence, increased numbers of gaming machines and tables and a seven-year casino tax freeze.

Neither deal has come quickly. The Adelaide deal took two years of planning and negotiation to get to approval, while the Auckland convention centre deal also took two years for initial parliament approval after being announced in mid-2011.

Foolish takeaway

The deals may have been a long time coming, but they will add significant long-term value for investors. Some analysts have estimated the additional value of the Auckland deal will be worth far more than the $351 million capital cost of constructing the convention centre.

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Motley Fool contributor Regan Pearson owns shares in Sky City.

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