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Crown Resorts fights to defend Melbourne jewel

License to operate Australia's biggest casino in jeopardy over 'misconduct'

The Crown Melbourne generates nearly three-quarters of its parent company's profits.   © AP

SYDNEY -- Australia's Crown Resorts is preparing to make a final attempt to defend its flagship Melbourne casino as an inquiry into whether the scandal-hit company should retain its operating license draws to a close.

Crown will have an opportunity on Tuesday to make its case to the independent investigation in the state of Victoria on why it should be allowed to hold on to its license despite allegations of money laundering and repeated breaches of gambling laws.

Lawyers assisting the probe have recommended that the company be stripped of its permit due to "serious misconduct" and "insufficient efforts to reform its culture."

Crown Melbourne is Australia's largest casino and generates nearly three-quarters of the company's profits. A favorable ruling, even one with conditions, is crucial for Crown's future and could help it retain or gain state casino licenses for Perth and Sydney.

The company's best chance of retaining its Victoria license could involve an 18- to 24-month period of state supervision, an option put forward by the assisting lawyers. During this time Crown would be required to overhaul its management and make significant investments in reforming its compliance systems and operations.

When it delivers closing remarks in Victoria this week, industry experts believe Crown will offer to further overhaul its board and management in an effort to assure the inquiry the company is serious about change.

"What we have seen is a lack of confidence in the board, as it currently exists, to make changes necessary for the company to turn around. The current board, as it stands, has no prospect of continuing," said Helen Bird, a lecturer on corporate governance Swinburne Law School in Melbourne.

Current Crown chair and long time board member Helen Coonan is likely to step down earlier than planned after her conduct was criticized at the inquiry. She was due to step down ahead of Crown's annual general meeting in October.

Crown Melbourne Chief Executive Xavier Walsh, who was similarly censured, is also expected to depart.

Following Crown's closing submission, the inquiry will make a final recommendation to the state government by October.

The investigation in Victoria was launched after an inquiry in neighboring New South Wales found in February that Crown was not fit to operate a casino in the company's new AU$2.2 billion hotel in Sydney, citing its failures to prevent money laundering at existing Australian properties and poor corporate governance.

This led to the departure of the company's chief executive and five board directors.

A separate public inquiry in Western Australia began in July, looking into activities at Crown's Perth casino, with final recommendations due next March.

The uncertainty has already wiped more than AU$2 billion off of Crown's market value, with its shares tumbling by a third from the AU$13.32 high touched in May. On Friday, Crown shares closed at AU$8.61.

It has also dashed hopes of a merger with domestic rival Star Entertainment Group, which last month abandoned its AU$9 billion bid for Crown citing the regulatory uncertainty.

Crown's board earlier rebuffed a conditional AU$8.4 billion approach from U.S. private equity group Blackstone. It has also shown no inclination to accept Oaktree Capital's offer to finance the company's buyout of the holdings of lead shareholder James Packer.

Like its gaming peers around the world, Crown has been battered by the pandemic and restrictions on travel, especially from China, a key source of high rollers. Its Sydney hotel and restaurants have remained shut for months amid a lockdown, while the Melbourne and Perth casinos are now open after repeated closures.

The company has flagged that it expects to post a full-year net loss when it reports results later this month. It posted a net loss of AU$120.9 million for the six months to December as revenues plunged 62.1% to AU$581 million.

"Right now, a lot of bad news is being priced into the share price," said Jun Bei Liu, portfolio manager at Australia's Tribeca Alpha Plus Fund, which holds Crown stock.

She estimates Crown's physical assets alone, which include prime real estate such as the gleaming skyscraper hotel overlooking Sydney Harbour, are worth the equivalent of AU$7 per share.

"That's assuming there is no license at all, which is an extreme case," she said. "But it does give us some confidence that a big part of the current share price is being underpinned by hard assets."

Although bidders have walked away for now, Liu expects Crown to remain an attractive target.

"There are a lot of interested parties in these assets. And Star has left the door open for the future because it is absolutely in their interest to merge with Crown," said Liu, whose fund also owns shares in Star Entertainment. "When we return to a post-pandemic world, Crown's properties around Australia would be premium defensive assets."

Losing its Melbourne casino would complicate Crown's efforts to redeem its brand, which once headlined ventures or developments in Macao, Manila and Las Vegas. Executives told the Victorian inquiry the company could default on loans if its long-term Melbourne license was canceled.

The move would also result in a financial hit for the state government, which earns hundreds of millions of dollars in taxes every year from the casino. Apart from being a tourist destination, Crown Melbourne is also one of Victoria's biggest private employers with around 11,000 staff.

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