Expert concludes The Star takeover unfair but “compelling” as group teeters on verge of bankruptcy

With shareholders in The Star Entertainment Group (ASX: SGR) set to vote on a $300 million strategic investment from US casino group Bally's and pubs baron Bruce Mathieson in less than a month, an independent expert report has concluded the deal is "compelling" as the company is now at the "end of the road" for funding.

A technical analysis conducted by Grant Samuel & Associates determined the takeover's valuation at 10 cents per share (cps) is "not fair", given its methodology estimates the company to be worth $0.13- 0.31 per share, or between $411 million and $1.02 billion with the Gold Coast operation as its most valuable asset.

But this valuation was reached based on Australian regulatory policy that requires full underlying value to disregard any financial distress that an entity is suffering, leading the expert to clarify the reported valuation estimate is merely a "theoretical exercise" given the group's "precarious state".

"It does not represent potential values that shareholders in The Star can expect to realistically achieve at the current time," Grant Samuel & Associates states.

"Moreover, the valuation of The Star, given its current circumstances, is subject to considerable uncertainty. It is loss making and lacks a clear and defined pathway (bar regulatory changes) to restoring its profitability."

In fact, the expert claims any meaningful turnaround of The Star is dependent on some form of “level playing field” being put in place across both New South Wales and Queensland.

The report highlights how heightened regulatory restrictions have led to a sharp decline in The Star Sydney's market share of the local pokies market over the past few years, down from more than 9 per cent in FY19 to 4.5 per cent in the second half of 2024. This occurred while the overall market grew 7 per cent over the comparable period.

In contrast the Gold Coast operation has proven more resilient, but this is partially due to less local competition and non-gambling revenue, while tougher conditions such as mandatory carded play, cash limits and mandatory pre-commitments are in the pipeline for Queensland.

"The roll-out of these measures in The Star Sydney has demonstrated the negative impact they could have on customer visitations and revenue," the report states.

"While lessons could be drawn from that experience, the reforms are, on balance, likely to have a negative impact on The Star Gold Coast’s financial performance."

The report notes issues around valuation are also exacerbated by non-trading liabilities that may arise such as penalties from AUSTRAC civil penalty proceedings, tax disputes with the Australian Taxation Office (ATO) over historical GST and withholding tax treatment of rebates paid to junket operators, an ongoing shareholder class action lawsuit, and legal costs relating to ASIC’s civil penalty proceedings against former directors and officers.

The expert explains that The Star and its advisers have pursued a number of funding options over the past 12 months including asset sales and a variety of recapitalisation proposals, with a great sense of urgency as finances deteriorated.

"Although divestments of certain non-core assets have provided some relief to its capital position, none of the longer term funding options that were being pursued were able to be completed. The Star is now at the "end of the road”," the report states.

"It has essentially exhausted every other option available to it other than entering into voluntary administration. The Transactions are the only lifeline available to The Star.

"The prospects of an alternative recapitalisation proposal on terms more favourable to The Star are remote.

"The reality of the situation is that The Star is a forced seller on the verge of bankruptcy so other considerations are of much greater importance."

Despite concluding that non-associated shareholders would be better off if the transactions proceed, Grant Samuel & Associates did not make any firm recommendation. A general meeting regarding the transaction is due to take place at The Star Event Centre, The Star Sydney at 10am on Wednesday, 26 June.