Fine now, pay later: Is Star trying to game the government?

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In March, Star Entertainment successfully passed the hat around to shareholders who chipped in $800 million to give the casino group some breathing room. A month later it’s now gasping for air.

Its financial position has gone from bad to diabolical. And the previously unthinkable prospect of having to sell its marquee asset, the Star casino in Sydney, is now up for discussion.

Star Entertainment Group chief executive Robbie Cooke.Credit: Louie Douvis

So precarious is Star’s liquidity that it is trying to cut a deal with two state governments to allow the payment of $200 million in fines on some kind of instalment basis – a fine now, pay later.

Star has even engaged in presumptive talks on payment terms with financial intelligence agency AUSTRAC, even though the size of any settlement with the agency is unknown.

Is Star now an injured beast vulnerable to takeover? That is one credible read of the situation.

But it’s unclear exactly what motivated Star to announce just how ugly its liquidity and trading position had become.

Is it catastrophising about its financial position in an effort to game the recently installed NSW Labor government into rethinking a previously mooted plan to significantly increase the casino’s tax?

The former Liberal government had announced (but not yet legislated) a significant increase in tax for Star, which for its part had been furiously lobbying it to rethink its position in the run-up to the NSW election.

Reading between the lines, Star had been warning the then-Liberal government that a higher tax rate could threaten its ability to retain all 8000 staff employed in the Sydney casino.

Star has now pulled that trigger and announced 500 job cuts from the company.

That $800 million raising should have done the job of repairing Star’s balance sheet and shareholders would be within their rights to question why it hasn’t.

Or has Star been hit over the head with a continuous disclosure honesty stick that has dictated it divulge a warts-and-all financial picture to shareholders about “unprecedented low” earnings performance (outside COVID, when it was closed or operating with restricted guest numbers).

It feels like a bit of both.

When in February it announced its $800 million capital raising, this felt like a mighty big swing – bearing in mind the company is capitalised at only $2.1 billion. The whole idea was that after the raising it would pay off some debt, put a bit in reserve to pay those two $100 million fines, and get relief from its lenders who had applied strict financial parameters around its balance sheet.

That money should have loosened the fine and debt vice that was constricting Star’s balance sheet.

Star now says it is accelerating plans to refinance debt and increase its lending covenant “headroom”.

That raising should have done the job of repairing Star’s balance sheet and shareholders would be within their rights to question why it hasn’t.

There is no doubt that Star’s profits have deteriorated a lot since February when it posted its first half earnings. Profits for the first half were a long way from booming and Star Sydney was feeling the squeeze from increased regulation (such as being unable to provide free drinks to VIPs) and the costs of remediation.

Cleaning up its act has been expensive for Star, which has now been hit with problems at its Gold Coast casino, which it says is now experiencing “rapidly deteriorating” operating conditions.

Crown casino was confronted with similar issues Star is facing.Credit: Jason South

All this trouble was compounded by losing its Sydney monopoly, and more recently by the deteriorating economic conditions that have resulted in pressure on discretionary spending.

So forecasts Star issued in February for $330 million to $360 million in earnings (before interest, tax, depreciation and amortisation) for the current financial year have been restated down to $280 million to $310 million.

For those shareholders who had been piling into the stock over the past year on the assumption that all the bad news had already been factored in, this week’s Star announcement will be hard to hear.

Investors must be hoping that they will be rescued by a private equity predator looking to catch a falling Star. Star’s competitor Crown, which was confronted with similar issues, was taken over by Blackstone. So there is precedent.

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