Shares at 5½-year high as convention centre deal inked

SkyCity Entertainment Group shares rose to the highest level in 5½ years after the Auckland-based casino and hotel company inked a deal to build a $402 million convention centre in exchange for increased gambling concessions.

SkyCity shares rose 3.4 percent to $4.55, the highest since November 2007, after the deal was announced in Auckland by Economic Development Minister Steven Joyce and SkyCity chief executive Nigel Morrison.

The company gains concessions with a net present value of $316 million, giving the whole project a value of -10 million, according to a base case scenario assessed by Korda Mentha. On a weighted average cost of capital basis the concessions are worth $382 million for an NPV of $51 million.

SkyCity gets a 27-year extension to its Auckland casino licence and can add 230 slot machines and 40 gaming tables in exchange for meeting the $402 million construction, fit-out and land costs of a new convention centre in the city.

It also gets a further 12 gaming tables that can be substituted for automated table games, while up to 17 percent of slot machines and automated tables in restricted areas will be able to accept bank notes greater than $20.

And it can install ticket-in, ticket-out (TITO) and card-based cashless gaming technology on all the slot machines and automated tables in the Auckland casino.

The government has also undertaken to compensate SkyCity if the terms of the concessions are changed during the life of the agreement and also compensate the company if the casino duty or other casino-related taxes is increased from signing until four years after the centre is opened.

Significant discount

"It all seems very close to what I was expecting," says Jeremy Simpson, an analyst at Forsyth Barr, who has a 'buy' rating on SkyCity. Mr Simpson had already factored today's deal into his rating of the company, which is trading at "a significant discount" to his target price of $5.13.

A Reuters survey of eight analysts has a consensus rating of 'outperform.'

The agreement signed this morning between the government and the company is the culmination of almost four years of talks in what was a controversial decision to award the tender to SkyCity, the only interested party to propose meeting building costs for the centre.

"This will make us more competitive on the international stage," Mr Morrison told reporters at the briefing. It will allow the company to provide the facilities and services "that our interstate and international guests expect".

The total cost of the development includes land costs of $87 million. Much of the land is owned by state-owned Television New Zealand, which said today it had not yet been approached about the deal and would consider any offer on its merits.

Labour Party leader David Shearer criticised the deal as a "jackpot" for SkyCity which binds future governments to compensating the company for any future changes in either the concessions or levies.

Today's binding heads of agreement now needs to be followed by legislation and local council approvals.

Economic Development Minister Steven Joyce said the convention centre will add an estimated $90 million a year to the local economy, create 1000 jobs during construction and 800 jobs once the centre is running.

It is estimated the centre will draw some 33,000 additional conference delegates to New Zealand each year.

Construction is scheduled to start in 2014 with the centre completed in 2017.

(BusinessDesk)