The James Packer-controlled Crown Resorts (ASX: CWN) has announced that the casino operator has entered into agreements with the New South Wales government for the development of a six-star luxury resort at Barangaroo South in Sydney. The deal, which had previously received in principle agreement, is a blow to the current sole operator of a casino license in NSW, Echo Entertainment Group (ASX: EGP).
While there are still a number of conditions to be reached, including the passing of legislation to amend the Casino Control Act and reaching agreement with the developer of Barangaroo South, Lend Lease (ASX: LLC) there is a high likelihood that the Crown Sydney Hotel Resort will be operational from November 2019.
Echo's shares fell to $2.28 on Friday, which marks an all-time low since being demerged from Tabcorp Holdings (ASX: TAH) in 2011. At the Annual General Meeting held last week, shareholders were left uninspired by the year-to-date trading update and talk of capital expenditure programs in Queensland which could top $1.5 billion. Having lost its monopoly in NSW, Echo's management is now turning its attention to making sure Crown doesn't gain access to the Queensland market – the concern for shareholder is that funds are not spent in an "at any cost" attempt to retain the monopoly. A decent return on shareholder funds it what matters the most.
It is certainly two very different stories for shareholder returns in Crown and Echo over the past year. In a period in which the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 21.4%, Crown's share price has rallied 64%, while Echo's has fallen 30.5%. In comparison Skycity Entertainment Group (ASX: SKC) — which operates casinos in regions currently not under threat of new competition, including in Auckland and Adelaide — has seen its share price rise nearly 13% in the past 12 months.
Foolish takeaway
While some investors understandably prefer to not invest in the gaming industry, for those who are comfortable owning stocks in this sector, the business models can be appealing. The regulated nature of the industry can create steady earnings while population, tourist and income growth is all helping to boost spending on entertainment and gaming.
