GAMING sector giants Sun International and Tsogo Sun – along with local empowerment firm Grand Parade Investments (GPI) – are playing a new hand in a bid to ‘diplomatically’ share the spoils in the lucrative Cape Town casino sector.
In short Sun and GPI wil each sell a 10% stake in the GrandWest and Worcester casinos to Tsogo in a transaction worth R1,35bn.
The official reasons for the transaction seem fairly innocuous. Tsogo said the deal represented an attractive investment opportunity which secured an interest in quality casino assets in the Western Cape.
“The proposed transaction is consistent with Tsogo’s growth strategy of allocating capital to attractive opportunities in the hotel and gaming sector.”
Sun said the deal allowed it to realise a portion of its investment in Western Cape assets at market value without compromising its control or management of the assets. Sun added that the cash proceeds would be utilised to repay debt.
But there’s a lot more to this casino shuffle than meets the eye; Last year Sun, Tsogo and GPI abandoned a transaction that would have evened the odds on the Western Cape gaming table by proposing a radical ownership shift at the cash spinning GrandWest casino in Goodwood and the smaller Golden Valley casino in Worcester.
Effectively Sun – the controlling shareholder in both casinos – and empowerment partner GPI would sell off a portion and all of their respective shareholdings to give Tsogo an influential 40% stake in both properties.
The competition authorities, however, did not look favourably upon the proposed ‘carve-up’. On paper, there was a concentration of ownership as Tsogo – which already owns the Caledon, Mykonos and Garden Route casinos – would effectively have influence over all five Western cape-based casinos.
In fact, the proposed deal had less to do with building a monopoly and much more to do with corporate diplomacy.
The proposed deal was essentially an attempt to prevent hostilities breaking out if the Western Cape government ever followed through on rumoured plans to allow a second casino licence in Cape Town. Officially, GrandWest’s period of exclusivity ended in 2013 – although there has never been scope for a sixth casino licence in the province.
But the second Cape Town casino licence – purportedly - would entail transferring an existing Western Cape licence that currently operates outside the city to the Cape metropole.
In other words the Western Cape government would allow either the Mykonos, Caledon, Garden Route or Worcester casino licence to be transferred to Cape Town.
Naturally a bigger casino in a vibrant urban centre could mean bigger tax flows to provincial government coffers.
The quandary for Sun and Tsogo was that both companies could lose if a second casino licence transfer was allowed. Sun would lose out on revenues at GrandWest when a rival casino started operating – remembering that Tsogo – which operates the Caledon, Mykonos and Garden Riute casino – would be the odds on favourite to be awarded the second licence.
Tsogo, on the other hand, might not want to be burdened with the massive cost of developing a casino complex in Cape Town, and then also be faced with potential long and costly legal challenges from Sun around continued exclusivity for GrandWest.
What’s more the chances of Sun’s Worcester casino being awarded the second licence in Cape Town could never be entirely ruled out.
The hands that Sun and Tsogo subsequently laid out on the table in April is probably the best compromise that could have been reached in a high stakes game. Essentially the concerns of the competition authorities are circumvented by Tsogo only taking a 20% stake in the GrandWest and Worcester casinos.
This means Tsogo gets no representation on the boards of the casinos, nor will it have any management sway in the respective operations.
But what the re-shuffle of ownership does is give Tsogo enough skin in the game in Cape Town – remembering that GrandWest is the most profitable casino property in South Africa – to dampen any enthusiasm for a second casino in the city.
If a second casino licence does come to pass Tsogo can make doubly sure any development it undertakes does not impinge on GrandWest…or even back a motivation to more the Worcester licence to cape Town (which means less development cost will be incurred).
Sun can now concentrate on eking out improved returns from GrandWest, and if continued exclusivity does come at a cost of new development then it has a deep pocketed equity partner in Tsogo.
GPI also gets a fair shake. The company – now in the throes of rolling out its Burger King fast food chain – gets a R675m cash injection (in monthly instalments of R37,5m over 18 months) but gets to keep a valuable 15% stake in Grand West and Worcester.
The remaining ‘significant minority’ stakes in both casinos could become valuable bargaining chips for GPI as its push into the food sector broadens.
By Jenni McCann