Podcast: Mergermarket's Q1 M&A Trend Report and Blackstone's Bid for Crown Resorts

Blackstone's bid for casino giant Crown Resorts

Mergermarket Research Editor, EMEA, Jonathan Klonowski, joins Julie-Anna Needham to discuss Mergermarket's Q1 global M&A trend report. Stephanie Hanna, head of special situations, Asia-Pacific, for Dealreporter and Mergermarket also joins Julie-Anna to discuss Blackstone's bid for casino giant Crown Resorts.

In this podcast, you’ll hear about:

  • Highlights from Mergermarket's Global & Regional M&A Report 1Q21
  • How cross-border dealmaking has recovered from last year's lows to hit record first-quarter activity
  • Blackstone's bid for Australian gaming and entertainment group Crown Resorts 

Transcript

JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C IntraLinks. I'm Julie-Anna Needham. In this episode, we're looking at the bid for the Australian Casino operator Crown Resorts. But first, we're going to explore some of the trends highlighted in Mergermarkets Q1, global M&A report. I spoke to Jonathan Klonowski, research editor for EMEA. Welcome, Jonathan. Thanks for joining us today.

JONATHAN KLONOWSKI: Thank you. Thank you for having me.

JULIE-ANNA NEEDHAM: So 2020 saw a blockbuster end to the year for M&A activity. What have we seen in the early part of this year?

JONATHAN KLONOWSKI: Yeah, so actually, we've kind of seen a continuation of that. We saw M&A really rebound in the second half of last year after, I mean, complete collapse in the market following the outbreak of COVID. And yes, so that recovery in the second half was kind of just carry through into the first quarter seen around $1 trillion in transactions globally. So far this year, which is the most active first quarter since 2006. So, yeah, as I said, kind of carrying on where we left off in 2020.

JULIE-ANNA NEEDHAM: And what are the headline deals in that? What are the biggest deals you're seeing?

JONATHAN KLONOWSKI: So we've-- I mean, we've seen a big concentration of sparks, but particularly in the US. Here in Europe, we saw that the largest deal with National Grid and Welsh Power, which is actually the second high profile utilities merger in Europe in the last six months after the Veolia and Suez deal the second half of last year. Yeah, so we're seeing a lot of energy, a lot pharma, but tech TMT is the one that's really booming and kind of continuing from last year as well.

JULIE-ANNA NEEDHAM: And what are you seeing in terms of cross-border activity?

JONATHAN KLONOWSKI: Yeah, cross-border is a really interesting one. I mean, obviously, we saw a pretty much complete collapse in cross-border M&A following the outbreak of the pandemic. I mean, if you just think about deal-making logistics and international travel, and going onto sites, and that kind of thing, that due diligence really it became really difficult. And so, as we're now a year on, we can travel a little bit more now.

That cross-border has also recovered along with M&A, and that has-- cross-border M&A has actually hit record first-quarter activity, and it's back to its historical average of around 45% of the total deal value. So, yes, along with overall M&A, we've seen that recovery of cross-border. And I think as far as economies continue to open and as we continue to get past and COVID, we'll continue to see cross-border increase. Well, at least, stay at the same level, at least.

JULIE-ANNA NEEDHAM: What do you see? You mentioned technology earlier. What are you seeing in the wider kind of TMT sector? And do you expect that sector to remain active during 2021?

JONATHAN KLONOWSKI: Yeah, I mean, that's clearly been the most active sector. It's-- if you think about traditional corporates, especially that they've been trying to digitalize and innovate for the past few years, and the pandemic has just accelerated that process.

And if you think about simple things that used to be done pre-pandemic, a lot of you think about a lot of direct-to-consumer businesses and the amount of tech. The increase in tech that we now use because of the pandemic, which is obviously pretty high that just all feeds into an increase in valuation of tech assets. You see these cross-sector deals. You see traditional corporates buying into tech and wanting to innovate.

So, yeah, tech itself accounts for around a 1/4 of M&A activity and TMT as a whole obviously even higher. Telecoms are seeing some huge deals before-- and there's a lot of investment into 5G and fiber networks. So that whole sector is definitely going to remain very active for the rest of the year. You've obviously got corporates and sponsors that are investing heavily into that.

JULIE-ANNA NEEDHAM: And on that note, we know that private equity groups have been sitting on record levels of dry powder for some time now. What evidence are you seeing of private equity activity in 2021?

JONATHAN KLONOWSKI: Private equity was-- had a pretty robust deal-making kind of throughout 2020. Even through the pandemic, we still saw quite a few private equity deals take place. And that's just continued and boomed through the second half of last year and into this year. And as you said with the dry powder, we've got a pretty good financing market at the moment. Yeah, it's a good place for the private equity firms at the moment. We've seen plenty of corporates looking to carve out certain assets, which will always attract private equity firms who can-- you think they can add value to it.

And we're also seeing an increase in take private in buyouts of listed firms. There was a bit of a drop last year for obvious reasons, and that's certainly coming back. We've already seen an increase in take privates. In the second half of last year and then continuing to into this year. And I think that's something that we'll continue to see.

JULIE-ANNA NEEDHAM: And what about lapsed deals? Are you expecting to see some deals come back? I mean, there must have been a few things that fell over in the early part of last year that people might be looking to resurrect.

JONATHAN KLONOWSKI: Yeah, I think that's obviously a big part of why there was such a surge in the second half of last year. I mean, if you look at the last six months of 2020, it was really quite extraordinary when you look at the numbers. So I think you're right that that was a big part that was just with firms looking to do those deals that had been paused, or it's fallen apart completely.

So I think, and yeah, I think the first quarter is kind of a bit of a continuation of that. So obviously, we're now a year on, so maybe it's this-- it was more so in the last six months of last year. But, certainly, companies will still be looking at deals that they were previously thinking about the pre-pandemic.

JULIE-ANNA NEEDHAM: Great, Jonathan. Thanks very much.

JONATHAN KLONOWSKI: Thank you.

JULIE-ANNA NEEDHAM: So Jonathan highlighted the high level of deal activity we're seeing from private equity buyers. The Australian gaming and entertainment group Crown Resorts recently received a bid from one of the biggest private equity groups Blackstone. I spoke to Stephanie Hanna, researcher for special situations in Asia for Dealreporter, to find out more.

So can you start by giving us an overview of the situation, please?

STEPHANIE HANNA: Yeah, sure. So Crown Resorts is an Australian casino and hotels operator. And last month, it received a bid from US private equity firm Blackstone. Now, Blackstone holds close to 10 percent of Crown's shares already. It bought that stake almost a year ago during the pandemic from Melco resorts, which is a Macau-based Casino group.

And Melco had initially wanted to lift its stake in Crown to 20%, but at the time, it ran into regulatory hurdles, and that deal was called off. So Blackstone bought that initial stake at $8.15 a share. Australian dollars. And its latest bid comes in at $11.85 a share. And the Crown board has said that it's assessing the bid.

But keep in mind this offer comes at a very vulnerable time for Crown, when it's not only trying to recover from the impact of the pandemic, but it's also addressing concerns from numerous regulators in Australia about its suitability to even run casinos. And on top of that, the CEO of Crown and several other directors have stepped down in recent months.

JULIE-ANNA NEEDHAM: We'll come on to some of that in a minute. But what has happened to Crown share price since the deal or since the bid was announced? And what can we deduct from that?

STEPHANIE HANNA: Yeah, so the shares initially traded above the offer price and then have dipped slightly. But they've continued to hover around this offer price level. There are still many conditions attached to Blackstone's proposal. So the fact that the shares have been hovering around this level, and trading three times at times, tells us that the market may be expecting a higher bid to come in, be it from Blackstone or somebody else.

And we have been reporting that some minority investors felt that Blackstone's offer was far too low and that there was room for improvement. For them, a bid at $13 a share would need to be the starting point for any serious offer negotiations.

JULIE-ANNA NEEDHAM: If there are any other potential counter bidders, who are they? And what might prevent them from bidding?

STEPHANIE HANNA: Yeah, so rival bidders can broadly be divided into two categories. You've got the PE firms that have invested in this industry before, such as TPG and Apollo. And then you've also got other Casino operators. So about two years ago, when results were in talks to buy Crown, but the American bidder walked away after those talks were leaked to the press.

Now, Wynn still doesn't have a presence in Australia, and neither do other foreign casino groups like MGM Resorts. You've also got Crown's competitor at home, Star Entertainment. And it has long been rumored that Star could merge with Crown. Star is backed by two Hong Kong conglomerates with very deep pockets.

But for bidders, the elephant in the room is the ongoing scrutiny that Crown is facing. So in February, a government investigation led by commissioner Patricia Bergin found that Crown is no longer suitable to hold a casino license in the state of New South Wales. Now, the company was close to opening the casino there in Sydney, so the commission's decision obviously puts a dent in those plans.

And you've also got similar investigations running in Western Australia and Victoria, where Crown's other casinos are based. Look, it's not unusual for casinos to operate in highly regulated environments. But in Crown's case, it was found that the company was not doing enough to prevent money laundering. And that it wasn't properly vetting the junket operators that it worked with. So I think casino groups will only throw their hat in the ring for Crown if they can be comfortable with this level of regulatory risk.

Now, I think Blackstone is comfortable with all of this because it's mostly interested in Crown's real estate. We all know that real estate is Blackstone specialty, and whether or not the Sydney casino opens, Crown is still sitting on land that's in a highly sought-after location. And if Crown can regain its Sydney license, analysts have suggested that Blackstone could bring in Star entertainment to help run the casino business.

JULIE-ANNA NEEDHAM: Will that cause any other bidders problems? That investigation and the fact that it was found not to be a suitable operator of gaming or gambling venues?

STEPHANIE HANNA: It could be an opportunity for other bidders to help fix crown's image. And so, if a casino operator feels capable enough to be able to turn around Crown's corporate governance standards, they might step in. But in choosing to buy such a controversial company right now also endangers the bidder's reputation itself. And so that may have implications for the bidder back in their home markets.

JULIE-ANNA NEEDHAM: And we've got a major shareholder, James Packer, who's involved in this situation. He's got a large holding. So whatever he decides to do, whatever his role is, is kind of crucial to the situation. But that report that you mentioned questioned his suitability as an investor, whether he should be an investor in licensed gambling in the future.

JONATHAN KLONOWSKI: That's right. So James Packer, a well-known billionaire in Australia. He owns about 37% of Crown. And look, it's no secret he is a willing seller. He has sold shares in the past, and it was Packer himself who tried to sell part of his stake to Melco two years ago. Packer and the Melco Chairman, Lawrence Ho, go back a very long way. It was arguably that relationship that sparked commissioner Bergin's report.

And that report found that James Packer commanded a lot of influence at Crown. And it questioned whether he could ensure the casino doesn't become susceptible again to criminal activity. Commissioner Bergin also recommended that no one person should own more than 10 percent of the casino without prior approval. So that raises the question about whether Packer needs to sell down.

As for his role in the Blackstone proposal, I should note that Packer's board nominees recently resigned in the wake of Commissioner Bergin's report. So currently, Packer has no board representation. And Packer himself has reportedly said that he will follow the board's decision on the bid. So to me, that suggests that he and the board are on the same page now when it comes to Crown's valuation. And I think his comment provides some much-needed clarity for any interested bidders out there as to who they should be negotiating with.

So all eyes are on the board now to see whether they can negotiate an acceptable offer price. And given the extensive criticism around Crown's corporate governance, the board is under pressure now to not let their investors down.

JULIE-ANNA NEEDHAM: OK, so one to keep an eye on. And what's the kind of frame you're expecting to see here?

STEPHANIE HANNA: Well, given that the bid was disclosed in mid-march, we should be expecting some announcement from the company soon. In terms of the regulatory investigations that are happening, I believe Victoria's investigation is meant to wrap up in August, and WA's investigation is meant to wrap up in November.

JULIE-ANNA NEEDHAM: Great. Stephanie, thanks very much.

STEPHANIE HANNA: Thanks, Julie-Anna.

JULIE-ANNA NEEDHAM: That was Stephanie Hanna speaking to me Julie-Anna Needham. Thank you for listening to this week's episode of deal cost presented by Mergermarket and SS&C Intralinks. Please rate, review, and subscribe to the podcast. You can find us on our podcasts Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

12 April 2021