The proposed merger of gaming groups Gold Reef Resorts (GRR) and Tsogo Sun Holdings will create a massive casino entity that could use its stronger hand and powerful cash flows to make bold plays in South Africa and offshore. As a combined entity, GRR and Tsogo which Finweek reckons should take the new guise GoldSun Holdings would have generated EBITDA of around R3,5bn in 2009. That’s significantly bigger than “market leader” Sun International, which in the vear to end June 2009 generated around R2,1bn in EBITDA.

Perhaps more impressive than historic numbers is the geographic muscle the merger will produce (albeit not the kind of market dominance that should attract the attention of SA’s competition authorities). The merged entity will hold three casinos in two ol the most profitable regions: Gauteng (Montecasino, Gold Reef City and Silverstar)and KwaZuluNatal (SunCoast, The Golden Horse in Maritzburg and the Century Casino in Newcastle).

The enlarged group will also hold two casinos in the Eastern Cape (Hemingways in East London and the Queens casino in Queenslown), two in Mpumalanga (The Ridge and Emnotweni) and one in the Free Stalo (the Gold fields casino in VVelkom). Its Western Cape presence (The Garden Route casino, Mykonos near Langebaan and the Caledon Casino) is small at least in relation to Sun International’s highly profitable CrandWest casino. But some punters believe the larger corporate entity has.’ much better chance of shifting one of the smaller licences most likely Mykonos into the lucrative Cape Town urban area if the exclusivity of Sun International’s licence agreement can be successfully challenged.

Initially, Finweek reckoned a restructuring might be in the offing, which might see the merged company disposing of its smaller casino interests in a bid to focus on the Gauteng, Western Cape and KwaZuluNatal markets.

GRR CEO Steven Joffe says nothing could be further from the truth. “Our small casinos still hold a lot of value and we’ll be looking at expanding our portfolio rather than cutting back.” Joffe concedes the size of GRR/Tsogo does somewhat limit the number of gaming opportunities in SA which, we believe, may well include racing, Internet gaming and LPMs/electronic bingo. “But our size will offer us a better chance of looking for opportunities outside SA,” Naturally, the billion rand question is whether a “bigger is better” approach will garner the best returns over the longer term. There are already a number of market watchers who prefer specialist gaming opportunities such as Grand Parade Investments or Real Africa Holdings offering exposure to selected casino assets.

But Allan Gray which is also a major shareholder in Sun International has apparently given a thumbsup to the Tsogo/GRR merger. Perhaps Allan Gray recognises that at this (low) point in the gaming cycle a bulking up option is prudent. If no new (and wellpriced) opportunities are uncovered then at least there will be generous dividends from operational cash flows that should easily cover the usual litany of upgrading, maintenance and expansion programmes at the suite of casinos.

Finweek will be paying particular attention to Hosken Consolidated Investments, which really was the catalyst in bringing about consolidation in the casino sector via deals with Tsogo, Johnnie and Century Casinos. Though HCI will be a dominant shareholder in the merged entity, there have been suggestions the empowerment shareholder could be tempted to unbundle its shareholding.

But perhaps HCI (which will hold a 41,3% stake in the new entity) will only give serious thought to unbundling if SABMiller (which will hold 39,7%) contemplates something similar.

Source: Finweek – Marc Hasenfuss