Sun International and The Gaming Business
Sun International is considering buying a hotel group to boost earnings as a cap on the number of SA casino licenses limits its ability to expand its gaming businesses and a weak domestic economy undermines profitability at existing gambling operations.
The gaming and leisure company would issue more shares in order to fund the deal as it has limited scope to add further debt to its balance sheet. Sun international has a policy of keeping debt at around three times earnings before income tax depreciation and amortisation.
One of the main reasons for considering adding a hotel chain to Sun International is the fact the SA Government is reluctant to add to the 40 casino licenses it has already issued effectively limiting its options to pursue growth in the domestic market.
Sun International’s existing operations in various provinces are at different stages of maturity but in terms of expansion there are no constraints. An added incentive for a hotel chain is that 25% of Sun International customers are inbound foreign tourists yet very few of those spend much time or money on gambling – visitors don’t usually travel across the world to sit in a casino.
Profitability at Sun International’s 20 gambling and leisure units – which apart from Monticello in Chile and Federal Palace in Nigeria are all situated in Southern Africa – seems to be fading as sputtering domestic economic growth in the regional power house, SA, curbs buyer spending. The National Treasury expects real household growth in SA to slow to 3.6 % this year which is down from an estimate of 4.9% in 2011.
Of course another expansion strategy could involve domestic consolidation with the troubled Peermont group of potential target. However Peermont’s debt pf R9 billion debt is a significant portion which matures in 2014 which means that a takeover is unlikely.
Considering all that – snapping up an excellently-run hotel group might be a smart move.
