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Echo Entertainment Group Ltd gambles on growth

Casino operator Echo Entertainment Group (ASX: EGP), has announced the sale of its Townsville casino, as it seeks to focus on its core assets in Sydney and Brisbane.

Echo also owns the Jupiters Gold Coast casino, and is looking at redeveloping it.

Jupiters Townsville is being sold for $70 million to Colonial Leisure Group (CLG), and Echo is expected to book a profit of around $8 million on the sale after transaction costs. At that price, or around 10 times 2013 financial year earnings before interest, tax, depreciation and amortisation (EBITDA), it seems both parties may be getting a fair deal.

CLG owns and operates 15 hotels in Victoria and Western Australia, a brewery in WA, and a portfolio of assets in Northern Queensland, including two luxury resorts, Orpheus Island and the Daintree Eco Lodge. The company says it will develop the Jupiters Townsville Hotel and Casino into a leading regional resort, on the back of plans by the state government to support tourism in Queensland.

Premier Newman has announced plans to encourage more overseas visitors to the state, including new and revamped casinos, and upgraded infrastructure to cater for more tourist arrivals.

The Reef Casino Hotel in Cairns — with the property owned by the Reef Casino Trust (ASX: RCT) — has received a takeover proposal, and is currently awaiting approval from relevant authorities. The potential new owner plans to spend billions redeveloping the casino into a luxury resort and casino.

Echo has similar plans for its Brisbane and Gold Coast casinos, making them larger integrated hotels and casinos, although it is facing stiff competition from James Packer’s Crown Resorts (ASX: CWN) in both Sydney and Brisbane.

Foolish takeaway

The key here is potential growth. Echo sees its ability to garner more growth in capital cities and the Gold Coast than on the far north coast of Queensland. For CLG, Townsville probably represents the next step in that company’s evolution, being small enough to swallow without causing indigestion.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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