Scientific Game

Brisbane Picks a Winner

In its Queensland base, Echo gets a critical victory over rival Crown for the A$4 billion Queen’s Wharf redevelopment

Friday, 04 September 2015 19:18
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A year ago, things looked bleak for Echo Entertainment Group, Australia’s No. 2 casino operator. Arch-rival Crown Resorts had been licensed to break Echo’s monopoly in Sydney. Echo faced a new assault on its Queensland stronghold as the state government proposed new integrated resort developments in Brisbane and Gold Coast, where Echo still enjoyed exclusives. Brisbane’s Queen’s Wharf IR site was adjacent to Echo’s Treasury Hotel and Casino that, stuck in a landmark building that it couldn’t expand, would be overwhelmed by an IR on its doorstep.

Echo arrived at this critical moment carrying dismal results for the first half of its 2013-14 fiscal year, leading to the resignation of CEO John Redmond after barely a year on the job. No one questioned the character and skill of Mr Redmond’s replacement, Chief Financial Officer Matt Bekier, Echo’s third CEO in 15 months. But many wondered if a bean counter was the right man to craft strategy to win the bidding to create a high-risk, multibillion dollar IR. Echo appeared poised to live up to a reputation of finishing second best to Crown.

But last month, Echo rewrote the script, winning development rights for Queen’s Wharf. “From Echo’s standpoint, this was a must-win, particularly after losing its monopoly position in Sydney to Crown,” GamePlan Consulting founder Sudhir Kale says, equating Echo’s win with Genting securing a Singapore gaming license to protect its home base in neighboring Malaysia. “Echo trails significantly behind Crown in its Australian market share. Crown’s 56% share of the Australian casino market is already bigger than Echo’s 33%, and a Crown challenge on Echo’s Queensland doorstep would have skewed the balance further against Echo.”

The Queen’s Wharf win follows two good half years under Mr Bekier, with a healthy full-year results announcement expected this month, completion of a A$1 billion (US$732 million) makeover at The Star in Sydney, and Jupiters Gold Coast well into its A$345 million expansion while its putative competitor, a China-backed cruise terminal IR, founders in turbulent regulatory seas. The outlook has turned sunny for Echo.

RIVERFRONT TRANSFO RMATION

Echo leads the Destination Brisbane Consortium that won preliminary approval from the Queensland government to redevelop Queen’s Wharf, a 9.3 hectare (23 acre) riverfront precinct in the central business district of Australia’s third largest city “This project is potentially transformational for both Brisbane and Echo Entertainment,” Echo Chairman John O’Neill said in a company statement. Echo and partners Chow Tai Fook Enterprises and Far East Consortium triumphed in what became a head-to-head race with Crown and its partner, mainland China property developer Greenland Holdings.

“This is Echo’s opportunity to position itself as a major IR developer and operator,” Newpage Consulting Principal David Green says, noting that Echo’s current properties were built before it was spun out of Tabcorp Holdings, which focused on its Australian bookmaking operations. Mr Green believes a successful Echo IR “may position it for growth internationally, and it will certainly help Echo attract and retain a broader range of executive talent. It has also refreshed investor interest in Echo shares, so tapping the capital market may not be as challenging going forward.” ASXtraded Echo shares hit an all-time high following the Queen’s Wharf announcement.

Queen’s Wharf aims to put Brisbane, Queensland’s capital, with a population of 2.3 million, on the international tourism map and win it a bigger share of Australia’s growing number of big-spending Chinese visitors. It will take some time, though: site clearing for the estimated A$4 billion project won’t start until 2017, after remaining government offices are relocated, and completion isn’t expected until 2022.

Destination Brisbane’s plan may prove worth the wait. The IR component centers on the Arc, curved twin hotel towers linked by a rooftop deck. Clearly inspired by Marina Bay Sands’ SkyPark towering over Singapore, the multilevel Horizon Deck will include infinity swimming pools, spa facilities, plus a public area with restaurants and recreation space. The deck extends to the taller residential and hotel towers flanking it, with two more residential towers sited to the east. Echo says the 2,000 apartments to be constructed and sold are a key to making the redevelopment financially viable. The district will have more than 50 food and beverage options from fine dining to street stalls.

When the IR is completed, Echo will relocate gaming from Treasury to a new Steelman Partners-designed casino, with Treasury repurposed into a shopping mall, with an underground retail arcade connecting it to the IR complex. A Ritz Carlton in the heritage Lands Administration Building will replace Treasury’s current hotel. In all, the IR will have 1,100 hotel rooms under five brands including Darling, Chow Tai Fook’s Rosewood, Far East’s Dorset and a six-star Echo VIP property. The new casino will have a maximum of 2,500 gaming machines along with hundreds of tables. Gaming tax will be 10% for VIP play, 20% for mass tables and 30% for machines. 

The IR component is expected to cost A$2-2.5 billion, half paid by Echo and a quarter by each partner. Echo says it can fund the project “through existing and new debt facilities and free cash flow,” and analysts following the company agree. Chow Tai Fook and Far East Consortium will finance the residential component on a 50-50 basis. In addition to its share of profits, Echo will receive management fees for operating the casino based on revenue and earnings, while CTF and FEC will get referral fees for any direct VIP business steered to the IR. Complete financial details of the project have not been disclosed, as the government and Destination Brisbane finalize agreements.

SUBTROPICAL PARADISE

The revitalized Queen’s Wharf will feature “12 football fields” (Australian or otherwise unspecified in project documents) of public space along the north bank of the Brisbane River. “The Destination Brisbane consortium’s plans for public space set them apart,” Queensland State Development Minister Anthony Lynham said. “Their plan for Queen’s Wharf provides space for thousands of people to eat, shop, or simply enjoy Brisbane’s subtropical lifestyle.” 

The revitalization plan will enhance riverfront access and recreation opportunities with parks, an outdoor cinema, a wharf for short-term boat berthing along with water sports facilities, exercise area and spaces for major events, art installations, pop-ups, markets, dining and outdoor screenings. A new bridge for pedestrians and cyclists will link Queen’s Wharf to the South Bank arts and leisure district across the river and add a 1,500-seat lyric theater there. Queen’s Wharf tourist attractions will include a sound and light show on the river, water features and reuse of several heritage buildings to enhance the district’s distinctive character.

The Destination Brisbane plan shares many features with the rival Greenland Crown proposal, including the bridge, South Bank theater, outdoor cinema, hospitality industry vocational training and enhancement of existing transportation infrastructure, suggesting Queensland authorities laid down specific project guidelines. 

Premier Campbell Newman’s Liberal National state government proposed licensing new IRs in Brisbane, Gold Coast and Cairns, about 1,400 kilometers north of Brisbane. The initiative aimed to revive Queensland’s economy, reeling from declines in energy exports and a 6.5% unemployment rate, and produce new tax revenue to help reduce the A$74 billion state debt. In May last year, the government chose preliminary licensees for Gold Coast and Cairns and finalists for Queen’s Wharf. Then in January, Mr Newman’s government lost the state election. Labor formed a government led by Premier Annastacia Palaszczuk amid speculation it might scuttle the IR initiative. Ms Palaszczuk’s team delayed announcement of the Queen’s Wharf winner for several months but in the end embraced the project.

Announcing the selection of Destination Brisbane, Ms Palaszczuk said the Queen’s Wharf redevelopment will change Brisbane with iconic infrastructure to enhance its place on the international stage. She told media “the consortium was able to demonstrate to the government that they are ready to proceed. We needed to have that financial security but also we wanted to minimize any risk.” Ms Palaszczuk didn’t clarify what the risk might be. Queen’s Wharf is expected to create 2,000 or more construction jobs and more than 8,000 permanent positions. Plus, Echo promised to relocate its headquarters from Sydney to Brisbane if it was selected, a move expected to happen before the IR’s 2022 opening.

COMPLEMENTARY OFFERINGS

The Campbell government reportedly urged the Queen’s Wharf finalists to merge, leading Crown to ally with Greenland and Echo to join with Chow Tai Fook and Far East Consortium, which had submitted a joint proposal. The Destination Brisbane team complements Echo’s experience in Australia with reach into the China market, Australia’s number two source of visitors behind neighboring New Zealand.

Hong Kong-based Chow Tai Fook’s billionaire founder Cheng Yutung is a longtime investor in Macau gaming, owning a 10% stake in SJM Holdings parent company STDM since the 1980s. “I have no doubt that Chow Tai Fook group has very good relationships with the leading junket and VIP operators in Macau,” Pacific Financial Services founder Tony Tong, whose Hong Kong firm provides financial advice to the VIP sector, says. Chow Tai Fook’s jewelry arm has its own VIP program with 1.7 million members in mainland China, Hong Kong and Macau, and 4 million more in the VIP program of its New World department stores. CTF also brings the Rosewood luxury hotel chain to the project. For CTF, Queen’s Wharf gives it the stamp of approval as a casino partner in a jurisdiction outside Macau. That could bolster its applications to develop IRs in South Korea and Vietnam.

Hong Kong-listed Far East Consortium brings experience as a primarily residential property developer in the region with a solid track record in Australia. From mainland China to Melbourne, FEC targets Chinese buyers for its high rise properties, and a source says it has seen no slowdown in demand amid China’s decelerating economic growth and President Xi Jinping’s anticorruption campaign. Dorset Hotel group, focused on outbound Chinese tourists, is another key component in FEC’s “Chinese wallet” strategy and gives Queen’s Wharf additional traction with mainland visitors.

The Brisbane IR will also create a bookend to Echo’s Jupiters Gold Coast casino resort, 85 kilometers (51 miles) away in Australia’s leading domestic tourist destination. Jupiters, with 79 tables and 1,650 machines, was slated for up to A$250 million in improvements during Echo’s fiscal year ending 30th June, including refurbishing its current 592 rooms, upgrading and expanding VIP gaming suites and beginning construction of a new upscale hotel tower as part of a full facelift for the resort.

LANDING VISITORS

Government estimates project Queen’s Wharf will boost Brisbane tourism by 1.39 million visitors when completed and increase tourist expenditures by A$1.69 billion annually. “The center of casino gaming in Australia will shift from Victoria to Queensland,” Mr Kale says. “Punters visiting Queensland will have a choice of casinos whereas those visiting [Crown’s flagship property in] Melbourne will not have any choice.” 

Not everyone believes Queen’s Wharf will be a magic bullet for international visitors. “I doubt that a new casino IR in Brisbane will make a significant difference to foreign tourist visitation to Australia,” Mr Green says, “but it will certainly be a draw for interstate visitors, and for those who might otherwise find Brisbane unsuitable for more than a transit stop. It could certainly help prolong length of stay by people who visit the city.”

No doubt, though, winning Queen’s Wharf gives Echo a huge lift. Losing would have left it stuck in the Treasury facility, hosting 83 tables with about 1,500 machines, but virtually no VIP traffic, overwhelmed by the IR next door, putting nearly one-fifth of Echo’s EBITDA at risk. “The challenge with Treasury is there is nothing you can do within the footprint of the current heritage site,” Mr Bekier told Australia’s Fairfax Media, explaining the dearth of VIPs. “That’s why [Queen’s Wharf] was important for us. We believed we could very much transform the earnings potential of this location if we could move to a new site.”

With the IR, Echo hopes to keep narrowing Crown’s lead in Australia’s VIP market. Mr Bekier predicts VIP revenue at Queen’s Wharf will match the 30% share achieved at The Star in Sydney, amounting to about A$400 million last year. Crown’s VIP revenue shares in the first half were 27% in Perth and 43% in Melbourne for a six month total of A$500 million.

In the shorter run, Morgan Stanley estimates Australia and New Zealand will grow their share of the Asian VIP market from 4% last year to 6.8% in 2017. Analysts King Goh, Andrew McLeod and Mark Goodridge in Australia and Praveen Choudhary in Hong Kong suggest four key reasons for the surge. Australian casinos are liberally providing credit to junkets and paying 1.6% commissions compared to Macau’s 1.25%. Crown and Echo have each spent A$1 billion to improve their gaming facilities, with an emphasis on VIP offerings. Junket promoters, hungry for business as Macau VIP play continues to contract, are embracing these opportunities. Mainland players, looking for alternatives to Macau, are also embracing Australia as Chinese immigration there increases business and family ties. Morgan Stanley says Echo will benefit most from the trend, forecasting its VIP revenue will grow 52% this year and 29% next year, largely thanks to improved facilities at The Star and Jupiters.

With its Brisbane monopoly secured and other properties benefiting from needed updates, 2015 is shaping up as a banner year for Echo. The winning plan for Queen’s Wharf and its strong partners suggest Echo has even better years ahead.

 

Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.

 

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