Sky City in shootout at Christchurch corral

Thursday 8th April 2004

At first glance you might be forgiven for wondering how on earth Sky City Entertainment thinks it's going to get away with buying into the Christchurch and Dunedin casinos.

After all, the group already has the monopoly casino franchise in Auckland, Hamilton's only casino and a gambling hell in Queenstown.

If Tuesday's deal goes ahead it will effectively own five out of six New Zealand casinos the only other one is Queenstown's minute Steamer Wharf casino.

In fact, approval by both the Commerce Commission and the Casino Control Authority shouldn't be a problem.

The authority has to check only that an applicant is a suitable candidate to run a casino. Sky City already owns half of them so it would be unusual if the authority has changed its mind.

A Commerce Commission precedent was set when Sky City applied to build the Riverside casino in Hamilton.

The commission defined the market in which it would investigate potential dominance as casino entertainment in Auckland and Hamilton, so it is likely to consider the current application under casino entertainment in Christchurch and in Dunedin.

After all, it's scarcely as if the Christchurch casino competes with Auckland for customers.

If all goes well with the regulatory stuff, it looks as though Sky City managing director Evan Davies has bought himself some useful strategic stakes at reasonable prices.

The $93.75 million price for 40.5% represents 6.8 times 2003 ebitda (earnings before interest, tax, depreciation and amortisation). That compares with the 7.3 times paid recently for the Darwin casino, but in Christchurch Sky City has not gained a controlling stake.

The share Sky City bought yielded previous owner Aspinall $8.09 million last year, a return of 8.6%. As the debt Sky City will raise to fund the acquisition will come a lot cheaper than that, the buy will be cash earnings positive from day one.

Now comes the battle for control and, eventually, outright ownership.

Sky's buying into Christchurch Casinos Ltd has been opposed all along by the other 40.5% owner, Barry Thomas, although it still isn't clear to Shoeshine, or to Evan Davies, what Mr Thomas' problem is.

Unless the two can resolve their differences they will have to slug it out to buy the stakes held by British giant InterContinental Hotels Group which, with 10.4%, could put either party in control or by Invercargill businessman Louis Crimp

Crimp is a colourful character who outrages readers of the Southland Times by writing letters to the editor about "the looting of New Zealand by Maori," and his fellow townsfolk by fighting development battles with the city council.

But he has only 8.6%, not enough to confer control.

In any case, analysts suspect both Barry Thomas' Skyline and Aspinall, and so now Sky City, have pre-emptive rights over both stakes that will allow them, if the shares are sold, to acquire them in equal proportion, so the most likely outcome is that each will end up holding 50%.

Control of the board, however, lies with Thomas. As chairman he has the casting vote on a four-man board on which there is another Skyline director, one Aspinall (now Sky City) director and managing director Arthur Pitcher, whom Davies indicated he was keen to see stay on.

Davies could, of course, simply bid a price for the stakes, or just InterContinental's, that Thomas can't match.

But he is unlikely to want to do so. Although Sky City's balance sheet, with interest cover still at 4.5 times post-acquisition, is not stretched, investors are already questioning whether Sky City has been paying too much for its recent acquisitions.

In any case, Thomas looks seriously outgunned, ranged as he is against a $2.5 billion public company. The denouement will be interesting to watch.

Davies, with 33% of Dunedin Casino under his arm, will also no doubt be dropping in on Earl Hagaman, who owns 42%. Mr Hagaman is an astute fellow who acquired his stake during Skyline's war of words with Sky City and he is no doubt looking forward to the visit.

Counting chickens

With a bit of luck the February year will be the last for which Restaurant Brands reports an earnings fall.

With Pizza Hut NZ and Starbucks both performing nicely, the market arguably won't be overly worried by the poor performance of Pizza Hut Victoria, which has yet to struggle into profit.

The contribution last year was a $600,000 deficit.

The big worry has been the troubles of the flagship KFC, where contribution fell by 15.6% last year.

The full-year result masked a distinct improvement in the final quarter of the year, when margins appear to have recovered dramatically as recent profitability measures took root.

The big disappointment, according to research by First New Zealand Capital, is that the long-awaited savings from changing chicken supplier from Tegel to Inghams aren't going to have the effect investors have been hoping for.

The contract, announced in December 2002 and taking effect this July, was expected to save the company $5 million a year.

Higher grain costs and higher bills from utilities have taken their toll. But the big kicker is the Employment Relations Amendment Bill, currently before a select committee.

This, the company advises, will eat up most of the supply change savings.

First NZ hasn't changed its "neutral" recommendation but has a 12-month price target of $1.11, against a current price of $1.30.

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