Western Cape Business News

Send  Share  RSS  Twitter  01 Dec 2010

GAMBLING: Dark Clouds Gather Over Sun's Casino


Recent Western Cape Business News

GAMING giant Sun International has really held the aces – or should we say ‘ace’ - when it came to gaming in the Cape. The record will show that Sun International has made plenty of moolla from its cash spewing GrandWest casino in Goodwood – which unlike the clustered Gauteng market – is not hassled by any other urban competition.

The other Cape casinos – Mykonos, Worcester (owned by Sun International), Caledon and the Garden Route casinos – are simply too far removed from Cape Town to impinge, in any way, on the revenues of GrandWest.

But lately there have been two ominous developments for Sun International’s Cape Town dominance.

The first is an external factor, and revolves around the Western Cape provincial government considering whether to permit one of the other regional casino licence holders to relocate their casino to the Cape Metropole.

The official word from Sun International is that insufficient information is currently available to assess the potential impact on GrandWest’s revenue and profitability.

But Sun International has pointed out that if a relocation and establishment of a new casino goes ahead “it is likely to be material to GrandWest once opened”. The truth, though, is that such a development is not likely to take place before the end of 2012.

The last CBN heard was that the provincial government was still engaging interested stakeholders before taking a final decision.

While GrandWest’s period of exclusivity expires at the end of the year, it seems provincial government will extend the casino’s exclusivity until the process is completed.

All the Western Cape casino licences – save for Worcester – are now held in the soon-to-be-officially- merged Tsogo Sun/Gold Reef Resorts entity. The outright favourite – presuming the provincial government won’t allow Sun International’s Worcester to transfer its licence to the Cape Metropole – would be the Mykonos casino.

Unlike the other casinos Mykonos will not be giving up major structural developments in order to shift its licence to Cape Town. The move, though, would have a major impact on employment in an economically vulnerable West Coast – and one presumes Tsogo Sun would have to make some sort of compensatory investment to ensure jobs can be saved.

From what CBN hears, the provincial government is looking for a casino that is fundamentally different to GrandWest. We hear the new casino would be pitched at high-rollers (and well heeled tourists), which leads us to believe it could be situated at the Waterfront (perhaps – oh the irony - at Sol Kerzner’s One and Only Hotel?).

Naturally the provincial government – mindful of the need to create jobs – would be envisaging a rather grand affair – probably a casino that might be a good deal bigger and more swanky that GrandWest.

Perhaps Sun International would claim a new urban casino would cater for a different market. But there would still be serious market share issues to face up to…

It’s bad enough that Sun International might be dealing with some serious new competition in Cape Town, but the group also faces an internal challenge around the GrandWest casino.

Grand Parade Investments, the empowerment company that is Sun International’s empowerment partner in the Western Cape, has made a blatant challenge for the lucrative management contract for GrandWest.

GPI – via SunWest – holds a 30% stake in GrandWest as well as half of the Western Cape Management Company. Although GPI would only rank as a significant minority in SunWest, the company does hold voting control at SunWest.

GPI chairman Hassen Adams has highlighted potential benefits to shareholders stemming from the expiry at the end of 2014 of the operating management agreement whereby Sun International Management Limited (SIML) provides management services to GrandWest.

Adams noted: “While GPI has been dealing with this issue with its partner, Sun International Limited, and is hopeful that a mutually beneficial shorter-term solution will be found, the GPI board believes that failing this solution, GrandWest should nevertheless be fully capable of being self-managed, especially after 15 years of skills transfer, when this contract expires.” Adams explained that GPI shareholders would benefit from cost savings if management fees paid by SunWest to SIML were discontinued.

It’s not clear exactly how much Sun International earns in management fees from GrandWest. CBN would estimate at least R100 million a year – and that may be conservative.

Sun International surely won’t give up this valuable earnings stream without a fight. But GPI – which is now keen to take on the aspect of an operating company – won’t back down either.

One might expect negotiations around the management contract could take years, which would suit Sun International more than GPI.

While it looks like Sun International has got its work cut out internally and externally around Cape Town, it might be foolish to discount the company’s chances of retaining a very profitable presence in Cape Town.

Sun International is headed by a smart operator in the form of David Coutts-Trotter, who CBN would not bet against reaching a favourable negotiated settlement on both the exclusivity and management contract issues. But it won’t be easy…or cheap.

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