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KEEPING YOUR FRIENDS CLOSE AND ENEMIES CLOSER

Sun International concludes three strategic deals.

CAPE TOWN – In one move Sun International has removed the overhang of uncertainty that has dogged its share price since its exclusive casino licence expired in the Western Cape four years ago.

In a deal announced on Tuesday, Tsogo Sun will acquire 40% of Sun International company SunWest which operates the GrandWest Casino and Table Bay Hotel, and of Worcester Casino which operates the Golden Valley Casino.

Tsogo will acquire the stake from Grand Parade Investments (GPI) and Sun International. GPI is exiting its anchor investment – a 25.1% shareholding in SunWest and Worcester for R1.55 billion, while Sun International has agreed to sell a 14.9% shareholding to Tsogo for R635 million.

It is a case of keeping your friends close and your enemies closer.

GrandWest is the only casino in the Cape Metropole and according to Sun International has been right-sized to service this market. This property is the single largest contributor to Group revenue and profit.

The exclusivity on GrandWest’s ten-year Cape Metropole casino licence expired in December 2010 and since then the Group has been engaging with the Western Cape Provincial Government on securing a further exclusivity agreement. There is currently some debate as to whether a second Cape Metropole casino licence will be issued, or whether one should be permitted to relocate from elsewhere in the Western Cape.

“Tsogo has been interested in the possibility of Cape Metropole exposure for some time,” says Sun International CEO Graeme Stevens. “This deal will not see a major reduction in our earnings, and will introduce some stability in the Western Cape.”

If a second licence is issued in the Western Cape, nothing will preclude Tsogo or Sun International from bidding for it, he says.

Ahead of Tuesday’s announcement, Tsogo would have been the obvious contender for the licence. It holds three of the four casino licences outside of the Cape Metropole. These are at Mykonos in Langebaan, in Caledon and Mossel Bay. Sun International holds the fourth – in Worcester.

“The deal does not reduce the competitive environment, but it reduces the potential competitive environment,” says Andrew Kingston, manager of the SIM Industrial Fund. “It raises the question of whether a second licence is viable in Cape Town and forces the Western Cape government to make a decision.

“The deal seems to be an acknowledgement by Tsogo that it would not be viable to build a big casino,” he adds.

The second part of today’s announcement sees Sun International acquire a significant stake in the fast growing limited payout machine (LPM) market.

It has agreed with GPI to acquire up to 70% of GPI Slots in a deal that will be implemented in three tranches. The price will be based on the financial results of GPI Slots for the financial years ending June 2014, 2015 and 2016.

The first acquisition will be for an initial 25.1% interest based on an anticipated purchase price of R225 million. In the ensuing years the prices will be based on an equity value of GPI Slots determined by applying a 7.5 times EBITDA multiple to the actual EBITDA achieved for those years.

GPI Slots, through its various subsidiaries, holds sufficient LPM licences to allow GPI Slots to operate a current maximum of 5000 LPMs.

At the half year (December) GPI was operating 2539 slot machines. It’s also in the throes of acquiring an additional licence, trading as KZN Slots, which has 610 active LPMs in KwaZulu-Natal and can increase this to 1000.

GPI has invested significant resources in the development of the LPM market, which is now gaining traction. In the six months to December GPI Slots revenue increased by 19% to R275 million.

Stevens admits the deal was partly defensive, and partly an opportunity to move into new areas and products. “They have been eating our breakfast,” he says. “We have been trying to find a way into this market. This was the only really material opportunity to buy into the industry – everything else is a one-man-band.”

He believes there is opportunity to grow the product in South Africa, as well as in their other African and Latin American businesses.

GPI Slots has moved beyond the development stage and is probably ready for a company like Sun to take it to the next stage, says Kingston. “The deal is win win for both parties. For GPI it unlocks the development value – they have been building this business for some time.”

The third leg of todays announcement will see GPI sell its 5.6% shareholding in the Sibaya Casino in KwaZulu-Natal back to Sun International for R130 million.

This is in line with Sun International’s aim to streamline its corporate structure. It also facilitates the exit by GPI from this asset.

“This just cements the message that Grand Parade is getting out of casinos, while staying on for a while as a minority in the slot business,” says Kingston.

Post the transaction Sun International will hold an effective 67.2% of the Sibaya Casino.

The transactions require approval by the relevant gambling authorities.

These transactions bring to an end a partnership between Sun International and GPI that has lasted for 16 years. Tune in to Hilton Tarrant on the SAfm Market Update with Moneyweb tonight to hear more on GPI’s plans from CEO Hassen Adams.

The share rose by 2.77% to R106.50 on the day.

Source; Moneyweb – Sasha Planting