Sun in R9.4bn offer for casino group Peermont

Nompumelelo Magwaza

HOTEL chain Sun International planned to buy out casino resort group Peermont for R9.4 billion in line with the group’s strategy to enhance its existing portfolio and seek new growth opportunities, it said on Friday.

“This acquisition will enhance Sun International’s position and scale as a leading hotel, resort and gaming operator, which in turn positions it well to undertake larger developments and acquisitions globally,” said Sun International’s chief executive Graeme Stephens.

Sun International shares on the JSE rose 2.09 percent to close at R131.50 on Friday. Peermont owns Emperors Palace.

“Emperors Palace is one of the largest casinos in South Africa with an attractive financial and operating profile. The property has earnings before interest, taxes, depreciation, amortisation and management fees margin greater than 41 percent, which is well above the average of Sun International,” Stephens said.

Peermont operates a portfolio of gaming and hospitality businesses in South Africa and Botswana, owning nine casino resorts, three stand-alone hotels and one stand-alone casino.

The group was founded in 1995 under the name Global Resorts and was rebranded Peermont Global in 2003 subsequently listing on the JSE in 2004. Peermont later delisted in 2007 after a private equity-led buyout by a consortium led by Mineworkers Investment Company.

To fund the acquisition, Sun International said it intended to roll over nearly R3.9bn of Peermont’s senior debt and take on a fresh debt facility of R575 million. This will also include plans to issue 10.5m Sun International shares at R120 a share to the Peermont ordinary shareholders and the holders of preference shareholders for a total value of R1.2bn and a further rights offer up to a maximum value of R3.8bn.

Stephens said: “Peermont has a number of complementary attributes that will enhance our group. These include the fact that Peermont has established and well-maintained assets and infrastructure, particularly Emperors Place.”

He added that the group remained committed to its strategy to diversify its portfolio to increase exposure to offshore opportunities, in particular Latin America. “While the Peermont portfolio of assets will initially increase the proportion of the combined business that arises in southern Africa, it also opens the possibility of further restructuring of local assets, with a medium-term objective of creating a portfolio of fewer, larger, quality assets,” he said.

“This will also create diversification that will help Sun International’s reliance on its GrandWest property in the Western Cape, which currently represents about 27 percent of the group’s earnings before interest, taxes, depreciation and amortisation.”

The acquisition will also provide Sun International with an opportunity to increase gaming revenue from Gauteng, a provincial jurisdiction with the highest gambling spend in South Africa.

“The proposed transaction is a positive development for Peermont and supports the momentum that we have built during the past few years. We believe that a number of strong growth opportunities can be unlocked by being part of a larger and well-resourced group,” Anthony Puttergill, the chief executive at Peermont Group, said.

He added that Peermont shareholders would receive shares in Sun International as part of the proposed transaction and therefore stood to benefit from the critical mass and growth potential of the enlarged Sun International.

In addition to this acquisition, both the companies have reached an agreement to settle the objection by Peermont to Sun International’s Menlyn Maine project in Tshwane.

Through its wholly owned subsidiary Sisa, Sun International had applied to the Gauteng gambling board to amend its Morula casino licence to provide for the relegation of the licensed premises from the current site in Mabopane to Menlyn, in order to deliver full potential. This was approved by the gambling board in July last year paving a way for Sun International to commence planning and construction of the R3bn development known as Time Square at Menyln Maine.

Dirk van Vlaanderen, an investment Analyst at Kagiso Asset Management, said Sun International had highlighted its knack for creative solutions with the proposed acquisition of Peermont for an enterprise value of R9.4bn.

“We believe the deal has a sound strategic rationale as it increases Sun International’s Gauteng exposure and also takes the company closer to securing the future of the R3bn Menlyn casino development,” said Van Vlaanderen.

He added that there were some concerns around the valuation, particularly for Emperors Palace, which it was believed would see a significant decrease in revenues and profits when the new Menlyn casino opens in 2017.

“The extent of this decline will only be known when the event occurs,” he said.