Takeover terms found unfair to Star Entertainment shares investors but the 'only lifeline' left

Star has released the independent expert's report into the Bally's takeover deal and set a date for the vote.

Star Entertainment Group Ltd (ASX: SGR) shares are down amid the company naming a date for the shareholders' vote on its takeover.

Star Entertainment shares are trading at 11 cents per share, down 4.35% at the time of writing.

The company issued a Notice of General Meeting to the ASX after the market close yesterday.

The notice includes the independent expert's report on the takeover proposal from US casino giant Bally's Corporation (NYSE: BALY).

An independent report is required by law for takeover proposals to assist ASX shareholders in deciding their vote.

The independent expert, Grant Samuel & Associates, described the takeover terms as "not fair" to ordinary investors.

However, the expert also noted Star Entertainment's dire financial situation, with not enough funding now to last another year.

As a result, the expert found the proposal to invest $300 million into the beleaguered casino empire "compelling" for investors.

Let's take a look.

Young man sitting at a table in front of a row of pokie machines staring intently at a laptop.

Image source: Getty Images

When will Star Entertainment shareholders vote on the takeover?

Star Entertainment will conduct a shareholder vote at a general meeting in Sydney on Wednesday, 25 June.

The meeting will take place at The Star Event Centre in Pyrmont and will be viewable online.

Shareholders will vote on whether to allow two strategic investments into the company.

The first is a $200 million investment from Bally's.

The second is $100 million from Star Entertainment's biggest single shares investor, Bruce Mathieson, via his investment company.

The capital will be structured through the issuance of convertible notes and subordinated debt instruments.

Star Entertainment confirmed it received $100 million last month as part of tranche 1 of the takeover deal.

If shareholders okay the deal, the full conversion of the notes would give Bally's a 53.75% controlling stake in Star Entertainment.

A full conversion would give Mathieson's investment company, Investment Holdings, a 37.33% stake.

The Star Entertainment board has unanimously recommended the takeover proposal to investors.

Star Entertainment said:

The Strategic Investments by each of Bally's and Investment Holdings provide cash funding and assist The Star to continue as a going concern and avoid other consequences, such as voluntary administration, which may not be in the best interests of The Star's Shareholders.

Shareholders can vote before the meeting using the voting form if they are unable to attend the event.

Star must receive shareholders' voting forms by 10am on Monday, 23 June, to be valid for the meeting.

Expert says Star at the 'end of the road'

In its report, Grant Samuel said The Star "is in the midst of an existential liquidity crisis".

Grant Samuel described Star Entertainment's dire financial situation:

… The Star is now in desperate need of additional funds and there is no scope for more funding from existing lenders.

The Star is now at the "end of the road". The Transactions are the only lifeline available to The Star.

Grant Samuel said the terms of the Bally's and Mathieson investments were "not fair", but investors were essentially out of options.

The expert said, "The methodology required for this analysis under regulatory policy is, at best, theoretical and should not be the primary basis on which to judge the merits of the [Strategic Investments]".

Independent expert's conclusion

Taking every aspect into account on behalf of Star Entertainment shares investors, Grant Samuel concluded:

… there are compelling reasons for non associated shareholders of The Star to approve each of the [Strategic Investments].

They will clearly be better off if the [Strategic Investments] proceed than if they do not.

Accordingly, each of the [Strategic Investments] are reasonable having regard to the interests of the non associated shareholders of The Star.

By law, Star Entertainment is required to explain reasons why shareholders may not want to vote in favour of the proposal.

Among those reasons is the dilution of ordinary investors' holdings in Star Entertainment shares.

This is because a significant number of new shares may be issued to Bally's and Mathieson upon conversion of the notes.

Ordinary shareholders are also not entitled to participate in the Strategic Investments.

Additionally, Bally's and Mathieson may end up owning more than 50% of the company, and shareholders will not receive any "control premium" for this privilege.

How have Star Entertainment shares performed since the restart of trading?

Star Entertainment shares resumed trading on 16 April.

Since then, Star Entertainment shares have delivered flat growth.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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