SkyCity to spend $350 million on Adelaide Casino revamp

Maintaining the glitz and glamour of casino assets doesn’t come cheaply.

New Zealand headquartered SkyCity Entertainment (ASX: SKC) last week announced that it had reached final agreement with the South Australian government with regards to new regulation and taxation of the Adelaide Casino.

The signing of the agreement opens up the path for SkyCity to proceed with its planned $350 million investment in the Adelaide Casino to transform the casino into “a world class integrated entertainment and tourism complex.” As part of the agreement SkyCity will continue to enjoy its exclusive casino license until 2035, introduce premium gaming, receive lower gaming tax rates for premium gaming, and have the right to increase the number of gaming machines and the number of gaming tables.

SkyCity owns casinos in Auckland, Hamilton and Queenstown (New Zealand)  as well as Adelaide and Darwin (Australia)  — these are all very appealing monopoly assets. Given the size of the markets, the company is probably under less threat from potential regulatory changes that would introduce competition, which is the situation Echo Entertainment (ASX: EGP) has found itself in.

Echo owns The Star casino in Sydney, Treasury Casino in Brisbane and Jupiters Casinos on the Gold Coast and in Townsville. Echo recently completed an $870 million redevelopment of The Star; no sooner had it completed the redevelopment did the James Packer-backed Crown (ASX: CWN) begin lobbying the New South Wales government for a restricted Sydney casino license, which it was ultimately successful in attaining.

The hundreds of millions of dollars casinos must spend to keep their assets in premium condition require appropriate returns on those investments. While agreements with governments by and large provide certain safeguards, adequate return on investment is far from guaranteed.

Foolish takeaway

The past year has seen Crown’s share price rocket over 68% higher. In comparison SkyCity has slightly outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) returning 18%. Meanwhile, Echo, which has had to deal with the fallout from Crown’s expected entry into the Sydney market coupled with Crown making overtures regarding the Brisbane market, has seen its share price plunge 33%. If Crown does get access to Brisbane then these diverging share prices could well continue, however at current prices investors may be inclined to take a closer look at Echo. Likewise SkyCity’s monopoly assets are certainly worth keeping an eye on as well.

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Motley Fool contributor Tim McArthur owns shares in Echo Entertainment.

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