Odds against SkyCity sale

Skycity shares have had an unseemly rally over the past couple of weeks, quite out of keeping with the casino operator's prospects.

The reason? The acquisition of more than 2 million SkyCity shares by Australia's second-largest casino operator, Unitab, have sparked talk it is a takeover target.

Unitab chief executive Dick McIlwain later poured cold water on the suggestion, insisting the buy was only an investment. "It is only a little side interest, and we have no intention of doing any more with it," he told Bloomberg.

But that has had little effect.

SkyCity's shares have been trading above $4.80 for most of the week and offer an anything but exciting dividend yield of around 8 per cent.

Forgotten is SkyCity's bungling of a profit warning in May. (After first telling the Business Herald it was on track to meet market estimates, a week and a half later it changed its mind and its shares plummeted to a low of $4.22.)

Also forgotten is the warning itself: SkyCity had underestimated the effects of the ban on smoking in the casino and said it was having trouble with the technology designed to overcome bans on gamblers shoving larger- denomination notes into pokie machines. The upshot: full-year profits would fall from earlier forecasts of $114 million to $119 million to a new forecast of $100 million to $103 million.

Clearly, investors reckon there is a very real possibility that SkyCity remains in play.

However, Macquarie Equities has put forward an intriguing argument against such optimism, underlining its "underperform" rating and a 12-month price target of $4 a share.

It suggests the most likely buyer of SkyCity would be an Australian company. It then argues that in the event of a takeover the New Zealand Government would bring the taxation of casinos into line with the much harsher Australian laws.

It recalculated SkyCity's profits under the tax arrangements of differing Australian states and concluded profits would fall by around 15 per cent as gaming taxes rose by 34 per cent. SkyCity suddenly looks expensive.

"Any entity considering acquiring the group whilst contemplating taxes equivalent to Australia may have some difficulty making the numbers stack up," Macquarie said.

The argument hinges on the Government taking a hostile view on foreign-domiciled companies.

But there are grounds for supporting Macquarie's view.

* SkyCity must seem like low- hanging fruit to the departments of internal affairs and inland revenue. Casinos represent a quarter of the $2 billion a year (after prizes) gaming sector, and SkyCity dominates.

* Casino operators are maligned for preying on weakness, so there is little political mileage in granting tax concessions to them, especially Australian operators who function under a much harsher regime.

* Casinos have always been singled out for harsher tax treatment than the rest of the gambling sector because they are the only ones that keep their profits.

* Finally, if the history of the casino operator teaches New Zealand investors anything, it is to never underestimate the regulator. The smoking ban and the ban on large-denomination notes in pokie machines are examples of the perennial political risk.

One factor, however, lending support to those betting on a takeover is the upcoming election. Polls are indicating a real chance of a centre-right government.

Ignoring for a moment the unpredictable nature of a New Zealand First-National coalition, such governments are typically better disposed to foreign capital.

TRADING MINNOWS

It seems as if NZX boss Mark Weldon, witnessing a contraction in the number of listed companies on the market, can for the moment breathe easy over Sky City. But it should not give him much comfort.

This week's profit warning from Taylors Group amply illustrates the problem he faces: New Zealand's main board contains many tiddlers barely worth a mention.

Taylors warned that full-year after-tax profit would fall from $4.3 million to around $3.5 million. Its shares, as one would expect, plummeted from just over $2.50 to around $2.20.

So far so good (sort of). But what came next is most telling.

Taylors said a planned consolidation of its Auckland facilities at Avondale and Point Chevalier facility had not delivered.

Let's be frank, it is talking about the consolidation at two commercial laundries. Taylors has a market value of $54 million. This is a third of the value of the smallest company in the NZSX-50, but in absolute terms it is not that far removed from the benchmark index.

The New Zealand market lacks depth, and with the impending departures of Ports of Auckland, NGC following the loss of Powerco, Westpac, INL, Richmond, Vertex, and Williams & Kettle, the problem is getting worse.