Star Entertainment Group (ASX:SGR): Where to now in a post-COVID world? Does the Bally’s deal mean it is safe?

Star Entertainment Group boss Steve McCann has not been one to shy away from honesty. He has admitted his company would never again see the huge flow of high-end international gamblers flock to its casinos, and would be relying on restaurants and hotels for revenue.

Long story short: The pre-COVID days won’t be coming back. Even now, it is struggling with debt repayments and while there are some local high-rollers, why would they go to a casino when they can go to a pub and get the thrill of gambling without the probity checks.

Will the company find some sort of new normal? Is it doomed to be privitised? Or could it even enter administration? Let’s take a look.

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Remembering the glory days

Prior to the pandemic, the biggest money-spinner for the company was high-rollers – a terminology for gamblers with enough money to bet tens (if not hundreds) of thousands of dollars in one night…and perhaps come back the following night even if they lost it all. In some instances, they were specifically invited by the company or by a fellow invitee. Not even holding a Platinum and Diamond star membership could get you into a Sovereign Room, you had to be a part of their inner sanctum.

Even if the pandemic never happened, Star was set to face competition from the nearby Crown Casino, but perhaps they could’ve co-existed. Especially because Crown was at the time being dragged  through several inquiries.

How Star Entertainment Group fell in a hole

The pandemic did happen, however, and borders kept many of these high-rollers out. And when they re-opened, they were slow to reappear, not least because of diplomatic tensions between Australia and China, as well as the prolonged closure of China’s own border, not to mention crackdowns by authorities on off-shore gambling.

The company had decent hotel and entertainment precincts and people did come back to these. Although these were luxury tourists from interstate or in countries other than China. And furthermore, these are lower-margin businesses than gambling for high net worth individuals. This is before you even consider the intense competition in the hotel space. But now, many of the problems that were able to be swept under the rug could not any more.

In 2022, NSW Senior Council Adam Bell ran an investigation and recommended that Star was unsuitable to run a casino in the state – because it had engaged in many of the illegal activities Crown did. Specifically, Star had hidden criminal gang-linked junket operator Suncity’s illegal cash cage and allowed it to operate a secret gambling room.

It found it facilitated ~$900m of banned gambling transactions and had evaded taxes. Bell’s report described Star as,’ A case study of unethical conduct and cultural failure’. And the license was actually stripped. The irony of all this was that shares suffered an even worse decline than during the Corona Crash.

Robbie Cook didn’t work out

Investors have hoped the company could settle into a new normal. It hired a new CEO in Robbie Cooke, but he bit the dust and was replaced by Steve McCann just a couple of months ago, after the regulator expressed no confident in him. There had been some hope that a buyout could happen.

But also that it could dig itself out of a hole. The company successfully raised capital twice in 2023. And fresh from winning office, the Minns NSW Labor government backed away from the former Coalition government’s plans to charge an additional $120m in taxes which the company had warned would put it out of business.

You see, there’s a reason Star had to raise capital twice. $595m wasn’t enough to last it 6 months. The company told investors it had to refinance its debt and insulate itself from potential forthcoming pressures.

In 2024, Adam Bell was once again been appointed to lead a review into Star, after NSW’s Independent Casino Commission (ICC) indicated it was concerned about the change of pace at the company. The review found the culture was not changing (at least not fast enough). The Chief Commissioner of the ICC publicly stated that he was dissatisfied with the progress and wasn’t convinced it was appropriate to hand Star its license back.

Ultimately, the 2024 report wuld stop short of formally revoking its license but fined the company $15m, imposed extra regulatory requirements and kept its license suspended.

Public evidence was headlined by text messages between company executives using the word ‘war’ in relation to their dealings with the regulator. Chairman David Foster wrote to Cooke, “They are prepping for war, we’d better do the same, should we talk to KWN [King & Wood & Mallesons]?” Cooke wrote back later the same day, “We are meeting Monday to get ready for war.” This caused Cooke to depart in April 2024.

Keep in mind that Star’s license was only suspended, it was not been cancelled. So, a cancellation would have been the nail in the coffin. Star has conceded in its final submission to the report that it was not suitable to run a casino in its own right, but should be found suitable subject to conditions. The inquiry also focused on further allegations including falsification of welfare checks on customers.

The Steve McCann era has not been different

Steve McCann was hired in mid-2024 and inherited a mess. The hiring of McCann as CEO raised eyebrows, with media reports he went off to London just a week after joining. He was promised a $2.5m cash salary, $7.5m sign-on bonus, $2.5m retention bonus to be paid in FY26 and a no-hurdle, short-term incentive bonus worth $5m at the prices at the time he joined.

We have not even dealt with the company’s financial status. The company’s total revenue and gaming revenues were all falling as Cost of living pressures and competition are biting the company. Plans by the famous chef Tetsuya to have a restaurant fell over, and there were fears it would face a multi-million dollar AUSTRAC fine over its breaches of AML/CTF laws.

McCann said in his first media interview that time and patience was needed to win back gaming licenses and improve the culture. But either things aren’t working or more patience is needed. The company closed CY24 with $79m revenue but was burning through $50m every month. The NSW and Queensland governments were unwilling to give it sufficient tax relief (even if only because of the PR problem it could cause). And the company spent.6 weeks in suspension for failing to lodge its accounts. It made firesales of its event centre and the leasehold of its Brisbane building for $120m cumulatively.

2025 has been little better

The company was reinstated to trading, but only when it (finally) secured a financing package with casino operator Bally’s. Despite the package being secured in April, would take several months for it to be approved by regulators – it was only approved last week. The deal will see Bally’s own 38% of capital and appoint 2 directors. The Mathieson family will hold a significant stake too (23%).

The introduction of new casino regulations ID cards and cash limits in Sydney, among others, hurt the company. It closed FY25 with $430m in debt and $1.4bn revenue, with the latter figure down 19% in a year and 30% in 2 years. As we noted, local gamblers don’t want to go through checks insinuating they’re guilty of money laundering until proven innocent, especially when they do not have to if they go to their local pub and play the pokies. Take the word of the company (not us), this is sapping demand.

The threat of AUSTRAC fining it another >$400m also lingers – Star has warned it couldn’t afford more than $100m. For this reason, and others (including strict compliance conditions such as leverage ratios and interest coverage tests), Star is looking to refinance for the third time in two years.

Good luck, finding a lender…at least one willing to have even looser conditions than existing lenders (at least without very high interests and/or without knowledge of how big the AUSTRAC penalty will be). The lenders have been waiving them but had a gutful and given it until February to find a way to reduce debt.

At least investors approved the remuneration report at the AGM and so McCann is set to receive $7.5m. At the AGM, outgoing chair Anne Ward told investors it could be privitised like Crown was. Now this could lead to investors who buy in now making a good windfall. But for those who’ve held for years…not so much.

Any future?

In absence of some kind of M&A deal, it is difficult to see a realistic catalyst that would lead to the company reaching pre-pandemic levels again. Forget about high-roller gamblers from China coming back in their pre-COVID numbers, or making the same money from its hotels business, either by substantially cutting costs to make the same margins as from gambling.

Investors can just thank their lucky stars that this star was not completely stripped of its license earlier and go out of business.

But the threats of the company finally going out of its misery (whether into administration due to debt, stripped of its license) remain. Or perhaps just investors will if the company is privitised. We’ll be watching this saga with interest.