Analysis of Treasury Brisbane deal – will it relieve Star Entertainment’s struggles?

Lea Hogg September 9, 2024

The Star Entertainment Group’s decision to sell the Treasury Brisbane Casino building is emblematic of a company in distress. While the sale will provide a short-term infusion of cash, it is far from a solution to the company’s larger financial and operational challenges. The possibility of raising capital is fraught with difficulties, and without a clear regulatory outcome, the company’s future remains uncertain. The Star may need to consider more drastic measures, including a break-up of assets, to survive this troubled chapter in its corporate journey. Whether it can successfully overcome this remains to be seen, but the path forward will be anything but smooth.

The Star Entertainment Group, once a key player in Australia’s casino and hospitality sector, is going through a period of extreme turbulence. With over $1 billion in debt and its reputation marred by regulatory scandals. Its recent sale of the Treasury Brisbane Casino building to Griffith University for $67.5 million is seen as a stop-gap measure to ease its financial strain, but larger questions loom: Will this be enough to stabilise the cash-strapped company, and is it feasible for The Star to raise capital in its current precarious state?

:Dr Colin Lawrence a corporate governance and regulatory expert said to SiGMA News,”Star needs a total rethink of its strategy. Having lost 87.5 percent of its value in four years, divestment seems a strong possibility. The company needs a comprehensive review of risk-adjusted profitability and may have to form partnerships, which could challenge antitrust laws.”

The Star’s downward spiral

The Star Entertainment Group faces financial troubles exacerbated by poor regulatory compliance and market challenges. The company’s financial health was brought into sharper focus when it became apparent that it needed to refinance its $1 billion debt. The sale of assets, like the Treasury Brisbane building, is one of the steps being taken to shore up liquidity. However, this is more of a band-aid on a larger, deeper wound.

The Queensland government is mulling tax relief packages for The Star, but even that may not be enough to keep the company afloat in its current form. Regulatory scrutiny intensified after the release of the second Bell inquiry’s findings, questioning The Star’s suitability to hold a casino license. The possibility of capital raising in such an environment is fraught with risks.

Asset sales are a necessity not a solution

The sale of the Treasury Brisbane Casino building to Griffith University is a necessary but insufficient move for The Star. With the $60.7 million expected in net proceeds, the company can make a small dent in its outstanding obligations, but it does little to address its long-term solvency challenges. Moreover, the company is still sitting on other assets in the Treasury complex and the Festival Car Park in Brisbane, indicating that the process of asset divestiture is far from complete. While the sale may provide temporary breathing room, The Star remains heavily leveraged. Its 50 percent stake in the $3.6 billion Queen’s Wharf development is both a potential lifeline and a liability, contingent on regulatory approvals. Should these not materialise, The Star’s financial exposure to this mega-project could deepen its crisis rather than solve it.

Challenges of raising capital

The rumours about The Star potentially raising capital to shore up its finances raise critical questions. Given its battered reputation and ongoing regulatory challenges, raising money in this environment would be an uphill battle. Investors would be wary of pouring money into a company whose future is clouded by regulatory uncertainty and declining market confidence. Furthermore, market conditions are not favourable for The Star. The global economic environment has been challenging, with rising interest rates and inflation squeezing consumer spending, particularly in the hospitality and entertainment sectors. This puts further pressure on The Star’s ability to generate revenue, making it less attractive to potential investors. Even if The Star does manage to secure capital, it would likely come at a steep cost, either through high-interest loans or equity dilution, which could devalue current shareholders’ stakes. The sale of the Treasury Brisbane building may demonstrate some fiscal responsibility, but it also signals desperation—a company selling core assets to keep its doors open, a strategy that is unsustainable in the long run.

Poaching tactics from Crown Resorts

According to Star Entertainment’s latest move to secure former Crown Resorts executive Mark Mackay highlights its desperate efforts to regain stability. With Star struggling under immense financial and regulatory pressure, —subject to regulatory approval—signals yet another attempt to leverage expertise from its rival. Mackay, previously COO at Crown Melbourne, brings experience and familiarity with Star’s operations, having held a similar role at its Gold Coast property when it was Jupiters Hotel and Casino. His selection to replace Jessica Mellor, who resigned in May, is part of a broader strategy to decentralise management across Star’s three resorts: Brisbane, Gold Coast, and Sydney. The decision to tap ex-Crown executives, including new CEO Steve McCann and COO Jeannie Mok, is part of a pattern. Star has been aggressively recruiting from its competitor in a bid to stabilise its operations and plug leadership gaps left by the departure of key figures like former CEO Robbie Cooke and CFO Christina Katsibouba. This poaching spree hints at more than just a desire to rebuild; it reveals the depth of Star’s managerial crisis. However, Star’s financial woes complicate this managerial overhaul. Shares have been suspended from trading, and the company is scrambling to finalise a $300 million refinancing package. Meanwhile, the sale of its Treasury Brisbane leasehold interest to Griffith University for $67.5 million is one of the few bits of good news. The sale, netting $60.7 million after adjustments, may offer some relief, but it’s far from sufficient to offset the mounting pressures from delays at the Queen’s Wharf project in Brisbane. The real challenge, however, lies beyond the balance sheets. Regulatory failures loom large over Star’s operations. The release of the Bell II report by the NSW Independent Casino Commission (NICC) adds further uncertainty to an already dire situation. The report outlines Star’s ongoing failure to meet the regulatory standards required of a casino operator, further eroding investor confidence. Star’s inability to file its annual financial report on time only exacerbates its financial fragility, casting doubt on whether it can secure the funding necessary to complete its Brisbane project and avoid losing its Sydney casino licence. While restructuring expert Sebastian Hams has been brought in to discuss Star’s financial health, the picture remains grim. With over $1 billion in debt due over the next 14 months, regulators face a critical decision: push for a restructuring of Star or let the company fall into the hands of an administrator. Star’s current trajectory appears unsustainable unless it can secure the financial backing needed to weather this perfect storm of regulatory scrutiny and financial instability. Yet even with the influx of seasoned executives from Crown, one must question whether Star can truly recover or if its leadership restructuring is simply rearranging deck chairs on a sinking ship.

A tough road ahead

There are also murmurs about a potential break-up of the company. The Star’s collection of assets, including its stake in the Queen’s Wharf project and its portfolio of casinos, may be more valuable in parts than as a whole. Investors might see more upside in buying specific assets than in propping up the entire company. A break-up would, however, come with its own set of challenges. Selling assets in a distressed environment often leads to lower valuations, which could leave The Star with less capital than it needs to pay off its debts. Furthermore, the regulatory environment may complicate or delay any potential sale of its remaining casino operations, dragging out the recovery process.

Bell inquiry impact

The second Bell inquiry has cast a long shadow over The Star’s operations. With the New South Wales Independent Casino Commission still deliberating on the group’s fitness to hold a casino license, the future of The Star’s core operations hangs in the balance. A negative outcome could lead to more severe penalties or even the loss of licenses, further compounding its financial woes.

This regulatory uncertainty adds another layer of complexity to the capital-raising efforts. Investors tend to shy away from companies facing existential regulatory risks, and The Star’s situation is no exception.

I’m very negative on what I have seen so far. Given all the issues, my best guess is that we will see a merger, or further disposal of assets; obviously the brunt will be borne on lenders and shareholders could be wiped out.”
Dr. Colin Lawrence,
Corporate Governance expert

Historical legacy of Brisbane’s Treasury

The Treasury Brisbane Casino building, originally the Treasury Building, is a significant example of 19th-century classical architecture in Queensland. Built between 1886 and 1928, with contributions from architect J.J. Clark, it features neoclassical design, including Corinthian columns and decorative facades, symbolising its importance as Queensland’s administrative hub. Initially housing key government departments, including the Treasury and Premier’s office, the building was a centre of state power until the early 1990s. In the mid-1990s, The Star Entertainment Group (formerly Tabcorp) acquired and transformed the building into the Treasury Brisbane Casino, preserving its grandeur while repurposing it for leisure and tourism. Recently, The Star announced the sale of the building to Griffith University for $67.5 million, as part of its financial restructuring. Griffith University plans to convert it into its new Brisbane City campus, maintaining its historical significance while creating a modern educational hub for around 7,000 students by 2035. The university sees this move as a critical step in enhancing its global presence.