Bally's Potential Agreement carries High Risk, Possible Requirement of Extra Capital, Notes CBRE
In a significant move, Bally's Corporation has announced its acquisition of Star Entertainment Group, a deal that comes with potential risks and distractions for the US-based casino operator.
### Regulatory and Legal Risks in Australia
The acquisition is subject to regulatory approvals from Australian authorities in New South Wales and Queensland, including probity investigations into Bally's suitability to hold gaming licenses. Any adverse findings could delay or block the acquisition, leading to costly financial repercussions such as the redemption of AUD 200 million convertible notes.
### Risk of a Large Anti-Money Laundering (AML) Fine
AUSTRAC, Australia's AML watchdog, is investigating Star Entertainment. If AUSTRAC imposes a fine exceeding AU$100 million, it could render Star insolvent, jeopardizing Bally's $300 million rescue package.
### Financial and Operational Challenges of Star Entertainment
Star Entertainment's FY2025 revenue fell by 25% year-over-year, reflecting ongoing struggles. Bally's faces near-term financial risks due to Star’s revenue decline, Bally's own high debt load, and the 9% annual interest on Star convertible notes.
### Distraction from Core U.S. Growth Strategy
The focus on turning around Star Entertainment and navigating Australian regulatory hurdles may divert Bally's executive and financial resources from its key projects, including its Chicago casino hotel development.
### Impact on Bally's Chicago Casino Hotel Plans and Financial Status
The investment in Star Entertainment requires almost $195 million and exposes Bally's to potential losses if the rescue deal collapses due to fines or regulatory issues. This could limit Bally's ability to fund or accelerate the Chicago casino hotel project.
### Summary
Bally's acquisition of Star Entertainment Group involves high regulatory, legal, and financial risks, especially related to potential AML fines from AUSTRAC and Star’s financial instability. These challenges could lead Bally’s to withdraw from the deal if Star’s solvency is compromised. The acquisition also poses distractions and financial pressure that may hinder Bally’s Chicago casino hotel plans and strain its balance sheet, complicating its broader growth strategy.
The CBRE analysts believe Bally's views the Star assets as an opportunity for a modest capital investment with potential upside. However, they suggest that Bally's could be required to provide more cash for Star in the future due to its financial conditions. The agreement involves Bally's infusing capital into Star via a convertible bond sale. An accumulation of assets outside Bally's restricted group is concerning due to high restricted group leverage. The deal is valued at approximately $180 million.
- The financial implications of Bally's acquisition of Star Entertainment Group extend to potential costs associated with the redemption of AUD 200 million convertible notes if regulatory approvals are delayed or blocked.
- The Asia Pacific gaming market, through the acquisition of Star Entertainment, presents an opportunity for investing, but Bally's faces financial challenges such as the risk of a large AML fine from AUSTRAC, Star's revenue decline, and the annual interest on Star convertible notes.
- Regulatory and financial complications in the Asia Pacific gaming market, as a result of the mergers and acquisitions involving Bally's Corporation and Star Entertainment Group, may divert resources and strain the balance sheet, potentially impacting Bally's business strategy, particularly the Chicago casino hotel development.
