To be clear, Sun International is paying R3.2 billion in cash to buy the Peermont Group for Emperors Palace and Emperors Palace alone.
Sure, there’s the R4 billion in debt that it will assume as part of the transaction, but within two to three years of the transaction closing, it will resume its dividend payout ratio of 75%.
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There are some murmurs about competition authorities poo-pooing the deal, but the gambling – sorry, ‘gaming’ – market is significantly larger these days with the proliferation of sports betting operators such as Betway and Hollywoodbets (the two largest in SA). Expect this argument to be put forward by both parties (Peermont is a willing seller – its debt burden remains stubbornly high).
What, then, is so attractive about Emperors?
Well, it gives Sun International a major operation in the lucrative Gauteng market. Coincidentally, this deal will divide the largest provincial market in the country exactly in half along the N1/M1 highway. Sun International will own Time Square, Carnival City and Emperors Palace to the east. Tsogo owns Montecasino, Silverstar and Gold Reef City to the west, with its newly acquired Emerald Resort on the Vaal River being the exception (only because the N1 veers westward).
Just how ‘major’ was made clear on Monday following the release of the transaction circular to Sun International shareholders.
In the first six months of 2023, Emperors Palace generated R1.06 billion in income from gaming (net gaming win; i.e. its portion of bets), food and beverage, rental, as well as rooms revenue. The casino is, rather unsurprisingly, responsible for the bulk – 84% – of this.
On this R1.1 billion in income, it reported earnings before interest, tax, depreciation and amortisation (Ebitda) of a staggering R461.5 million. This equates to an Ebitda margin of 43%.
Read/listen: Sun International bets big on Peermont Group
Given that details have been scant following Peermont’s delisting in a private equity buyout in 2007, the two most lucrative casinos in the country have been Montecasino and GrandWest.
The former is in a prime position in Fourways, Johannesburg, while the latter has a monopoly on the Cape Town metro. The Western Cape government has been making painfully unhurried progress on licensing a second operator in the city.
Tsogo Sun, Montecasino’s owner, has since 2019 no longer disclosed the specific performance of that property. It lumps its casinos into regions, meaning that Gauteng includes Montecasino, Gold Reef City, Silverstar and (more recently) Emerald.
Monte vs GrandWest vs Emperors vs Time Square
We do, however, have historical data which allows us to infer that Montecasino is roughly around 55% of income and more than 60% of Ebitda in Gauteng.
In the 12 months to September, Montecasino is likely to have generated R2.5 billion in income. In its most recent annual report, Tsogo discloses the Ebitda margin for Montecasino (38.8%), but it is almost certain this is higher now following the return to normal trading conditions post-Covid.
At an Ebitda margin of ±40%, Montecasino will generate Ebitda of R1 billion. This is a massive business, and a massively profitable one.
GrandWest is similarly impressive (albeit with a lower margin). In the 12 months to June, it reported income of R1.8 billion and Ebitda of R638 million.
Emperors Palace is firmly in second place nationwide. Extrapolating out trading for the 12 months to June shows income of around R2.1 billion and Ebitda of just over R900 million. The reported Ebitda margin is 43% – and that’s in the non-seasonal peak between July and December!
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Sun International’s great hope in this market, Time Square, generated income of R1.5 billion in the 12 months to June, with Eibtda of nearly R600 million (a margin of 38%). It’s unlikely to grow significantly bigger. It could probably get to the GrandWest level – it, too, has a monopoly (in Pretoria).
* As at last disclosure in 2019
Emperors Palace’s sheer scale means that Peermont’s other “regional” operations – Umfolozi in Empangeni, Rio in Klerksdorp, Graceland in Secunda, Thaba Moshate in Burgersfort, Khoroni in Thohoyandou, Mmabatho Palms in Mahikeng and Frontier Inn in Bethlehem – pale into insignificance.
Together, these casinos reported income of R390.5 million in the first six months of 2023, with Ebitda of R71.4 million.
These smaller operations equate to a quarter of Peermont’s group income but only 13% of its profit.
They are a drag on earnings (never mind the start-up online and sports betting operation Palacebet). There are a further three properties in Botswana.
Shockingly, the Ebitda margins across these casinos (Botswana included) average out at 18%!
Sun International has a similar issue where its smallest five casinos – Boardwalk in Qheberha, Meropa in Polokwane, Windmill in Bloemfontein, Flamingo in Kimberley and Golden Valley in Worcester – are just 10% of income and Ebitda. At least these numbers are in line. Margins are a lot better than Peermont’s regional cruft at 26%. (The jury is out on perennial underperformer Wild Coast Sun, as well as The Maslow Sandton; an uncomfortable fit in the group).
Sun International CEO Anthony Leeming has hinted at potentially hiving off the smaller casino operations.
One can imagine these could be unbundled to shareholders. This makes a ton of sense. They all remain profitable, but their earnings profile dilutes the performance of the mega operations in the stable.
Just imagine a business comprising only Emperors Palace, GrandWest, Time Square, Sibaya, Carnival City and Sun City (and perhaps the Table Bay Hotel, which has the location to allow it to earn the outsize margins enjoyed by the rest of the group’s top operations)?