IT PROBABLY speaks volumes about the cash-spinning qualities of local casinos that the SA gaming sector, which is already highly concentrated, continues to see bouts of consolidation.

The local casino industry, leaving aside London Clubs International’s Emerald Resort & Casino on the Vaal River, is divvied up among three companies: Tsogo Sun (with Montecasino and SunCoast as its flagship casinos); Sun International (GrandWest, Sibaya and Carnival City as its main drawcards); and Peermont (best known for Emperors Palace). Fringe players include SABMiller, Grand Parade Investments (GPI), Phumelela, Niveus, RECM & Calibre and Trematon Capital Investments, which hold either minority stakes in casinos or alternative gaming assets in the form of LPMs (limited payout machines), electronic bingo or sports betting.

Despite the tight ownership of local casinos there have still been attempts to shuffle assets.

Late last year, the debt-laden Peermont was subject to discussions (subsequently terminated) around a takeover by GPI. Last month, beer giant SABMiller signalled it was reviewing its major stake in Tsogo. If SABMiller does want to be free of gaming and leisure assets then the smart money is betting Hosken Consolidated Investments (HCI) – the biggest shareholder in Tsogo – could take the opportunity to build a position of undisputed control.

The most surprising development, though, is Tsogo’s proposed acquisition of a 40% stake in each of Sun International’s two Western Cape-based assets: SunWest, which houses GrandWest and the Table Bay Hotel; and the Golden Valley in Worcester.

This deal was prompted by GPI seemingly abandoning its grand gaming ambitions by selling its anchor investments in the form of significant minority stakes in GrandWest and Worcester as well as its profitable LPM interests for R2bn.

GPI will sell its 25,1% of SunWest back to Sun for R1,55bn. Sun will also buy GPI’s 24,9% interest in Dolcoast (owner of a 5,6% interest in Durban’s Sibaya casino) for R130m and 70% of its profitable LPM business in a transaction spread over three years.

But more significant is the subsequent agreement for Sun to on-sell GPI’s stake along with another 14,9% interest in SunWest and Worcester to Tsogo.

This means Tsogo will hold an influential 40% stake in SunWest and Worcester. Sun remains the “managing shareholder” with a 57% stake in both casinos, but Tsogo will get board representation.

The arrangement means Tsogo Sun, SA’s biggest gaming group, now has a stake in all five Western Cape casinos – controlling the Garden Route, Mykonos and Caledon casinos as well as holding some influence over GrandWest and Worcester.

In essence, HCI’s master strategist, Johnny Copelyn, in the words of one punter, “has gone from a Johnny Come Lately to the casino industry to King Johnny of SA gaming” in just a few years.

The obvious question is why Sun would allow a rival to snap up a meaningful stake in its lucrative Western Cape operations.

Quite simple. The arrangement removes a potentially costly clash between Sun and Tsogo over a second casino licence for Cape Town – a matter which has been aired, though not officially promulgated, by the Cape Town city council.

With GrandWest’s period of exclusivity lapsed, the idea – driven by a desire to collect more tax revenue – is to allow an existing Western Cape licence (either the Garden Route, Mykonos, Caledon or Worcester) to be transferred to Cape Town.

GrandWest has consistently been SA’s most profitable casino, and Sun would not want its catchment area in unfashionable Goodwood compromised by a rival Tsogo casino in or around the vibrant Cape Town CBD.

Estimates are that a new casino closer to central Cape Town could deplete GrandWest’s visitor numbers by 40%-50%.

Tsogo, on the other hand, probably recognised that determined resistance from Sun could tie up the transfer of a second casino licence in court for some years. In addition, talk around the gaming tables is that the investment and development cost of the second licence might have dulled Tsogo’s enthusiasm for transferring one of its three existing Western Cape licences to Cape Town.

Though Sun spokesman Michael Farr is adamant the arrangement between Sun and Tsogo has nothing to do with proposals for a second casino licence in Cape Town, the new shareholding structure in SunWest and Worcester is a mutually beneficial hedged bet.

If a second casino licence never materialises in Cape Town then Tsogo still taps into the consistent cash spin of GrandWest. If a second casino licence does become a reality then Sun can take comfort in the fact that it’s now highly unlikely Tsogo will push for transferring one of its existing Western Cape licences because this would compromise the value of its stake in GrandWest.

If a second licence is awarded on terms that are appealing (that is, not dangerously detrimental to GrandWest), then the Worcester casino licence – now shared by Sun and Tsogo – could be mobilised.

The other big consideration is shared development costs. If a second casino licence is not awarded in Cape Town then GrandWest will need to reinvest substantially in a new development to retain its exclusivity for the longer term. Fortunately for Sun it will be convenient to have 40% shareholder Tsogo sharing this cost. The same applies if the Worcester licence is transferred to Cape Town and a new casino site and auxiliary infrastructure has to be developed.

One part of the broader asset reshuffling that might be overlooked is Sun’s snatching of 75% of GPI’s LPM interests.

The deal is a natural extension of Sun’s first foray into alternative gaming, when it bought out sports betting specialist SunBet, which also offers a foothold in the online gaming segment.

But more importantly the LPMs are a strategic weapon in an increasingly competitive gaming space. Sun has already seen how LPMs and electronic bingo (many owned by HCI’s subsidiary, Vukani) have eaten away at the market share and margins of its Gauteng casinos, especially Carnival City.

GPI’s Grandslots business is the dominant LPM operator in the Western Cape, and with Sun in control the business is unlikely to press for sites where punters can easily be tempted away from GrandWest. GPI has also built a solid LPM presence in Gauteng and KwaZulu Natal. This will allow Sun to keep Vukani’s LPM operations in check as well as lure some casino business from sprawling Tsogo casino operations.

With Sun’s Western Cape status seemingly sorted and its strategic shift into alternative gaming taking hold, the possibility of the company following through on its hints to let go some of its smaller casino assets also comes into sharper focus. Horse racing and sports betting group Phumelela, for instance, might nag Sun for talks around selling a few smaller casino sites. These don’t add much to Sun’s profit profile but could make an impact at the smaller Phumelela’s bottom line.

Whether Tsogo really wants exposure to five Western Cape casino licences (especially tiny properties like Mykonos and Caledon) remains to be seen. Trematon, which controls Club Mykonos Langebaan, might be a keen bidder for Tsogo’s stake in the Mykonos casino. Trematon, which is set to raise fresh capital, already owns a significant minority stake in the Mykonos casino.

This seems a “safe” arrangement even if a second casino licence for Cape Town stays dangled. Trematon would need to think long and hard before transferring a key asset like the Mykonos casino off its flagship leisure property.

Source: Financial Mail – Marc Hasenfuss