Business Maverick

Business Maverick

Sun International takes its bitter medicine

Sun City. (Photo: supplied)

It will come as no surprise to learn that Covid-19 has had a devastating impact on SA’s largest leisure company, Sun International, forcing the group to reschedule debt, embark on a rights offer, sell its Latin American operations and retrench thousands of staff. 

It was 2008 and the Chilean economy was ticking along nicely at 4%. The country was one of South America’s most prosperous nations, with the highest nominal GDP per capita in Latin America. It was one of the 30 most competitive economies in the world and welcoming of foreign direct investment.

For Sun International it seemed the perfect place to establish a base from which to expand into a promising and fast-growing region, diversify earnings while pivoting from an operator of luxury hotels with gaming on the side to a casino operator with luxury hotels on the side.

And expand they did, eventually becoming a majority partner in the largest gaming company in Latin America with operations in Chile, Peru, Colombia and Panama.

But it seemed luck was not with them and the business never seemed to reach its full potential. If it wasn’t the Global Financial Crisis, it was questionable policy and economic choices in the region, regulators banning smoking in Chilean casinos, or not renewing casino licenses, and now, Covid-19.

Sun International has announced its intention to exit its Latin American investments, selling its 64.94% share in Sun Dreams to its partner Pacifico for $160-million (R2.6-billion). This includes the 14.94% that Sun was meant to sell to Pacifico in April 2019, which was delayed due to a contractual dispute between the parties.

The deal is subject to earn-out conditions and approval from shareholders.

“Latin America has never been a disaster, but it hasn’t been a roaring success either,” says Anthony Leeming, CEO of Sun International. “But would we have sold it, if it wasn’t for Covid? Probably not.”

Long-suffering shareholders don’t seem to hate the deal, which was concluded in August, with the share rising 25% to R12.48 in the last 90 days.

Before Covid, Sun was in the process of restructuring and getting its debt under control. However, debt has since spiralled out of control, forcing the company’s local lending group to agree to a suspension of its debt repayments, waive covenant measures and reschedule debt.

In addition, the group raised R1.2-billion by way of a rights offer in August 2020.

South African debt increased from R8.8-billion on 31 December 2019 to R9.7-billion due to the funding of working capital outflow and costs incurred during the lockdown.

Net debt to adjusted Ebitda, a debt ratio that shows how many years it would take for a company to pay back its debt if debt and earnings are held constant, increased from 2.8x to 5.6x at 30 June 2020. 

The situation was much the same in Latam with debt increasing from R3.9-billion in December to R4.7-billion. 

This brought total borrowings at the end of June 2020 to R15.1-billion, up from R13.3-billion.

The proceeds from the disposal will be used to settle Sun’s offshore debt in Latam of R637-million, with the remaining proceeds being repatriated to South Africa. 

The Group’s interim results for the six months to June 31 reflect the significant impact the Covid-19 pandemic has had on it.

Consolidated income declined by 56% from R8.5-billion to R3.7-billion, and earnings before accounting treatments (Ebitda) reduced by 96% from R2.1-billion to R79-million. 

Group adjusted headline earnings declined from R172-million to a loss of R885-million, with an adjusted headline earnings per share loss of 702 cents per share.

Other measures taken to protect the business in the short term and position the group for sustainable recovery post the Covid-19 lockdown, include cutting payroll costs by 60%, deferring all capital investment other than critical spend, reducing operating costs and negotiating with service providers and suppliers for either a waiver, reduction or deferment of payments.

In addition, the Naledi Casino and Carousel Casino, which had been earmarked for closure, were closed and the disposal of other non-core assets was accelerated.

However, this was not enough to stave off retrenchments as the group was overstaffed going into the lockdown, says Leeming. This was after labour legislation changed in 2018, which required that Sun employ contractors who had worked for the group for longer than 3 months.

The proposed retrenchments will impact roughly 2 300 employees in South Africa, with particular impacts at Sun City, Maslow Sandton, Boardwalk, The Table Bay and Wild Coast.

“The pandemic required us to undertake a deeper review as we anticipate that it will take some time for our properties, in particular our hotels and resorts, to recover,“ he says.

Again, the same situation is playing out in Chile, where Sun has begun a voluntary retrenchment process involving about 1 000 people, with 451 employees to date accepting. This reduction will enable the business to control costs during the recovery period.

“Unfortunately Sun International was one of the companies that was ill-prepared for the Covid-19 crisis,” says Orin Tambo, a portfolio manager at 27four Investment Managers. “Its debt, while stabilising was high and its portfolio of South African assets was underperforming along with the poor economy.  The way forward is to stabilise its balance sheet and grow organically, at least that is the plan in Latam (using Peru as the nucleus). But that is not an easy feat given its business model which requires people gathering around and moving freely. While the SA government has loosened its lockdown restrictions on the sector, people are still not confident to travel so demand in the sector is suppressed.” 

Another consideration is that while the Latam deal will alleviate the group’s debt position it is somewhat of a drop in an ocean as the group will remain heavily indebted, he says.

The SA casino operations re-opened their doors on July 1, subject to strict Covid protocols.  

While most of the group’s bars and restaurants in the casinos remained closed because of limited demand and the various restrictions on the sale and distribution of alcohol, gaming revenue is slowly improving.

In July gaming revenue from casinos delivered 39% of the revenue they delivered in the same period last year, jumping to 56% for the first 27 days of August.

Sun City reopens on 2 September 2020. However, Table Bay in Cape Town, which derives 85% of its income from foreign tourists and the Maslow Sandton will remain closed until there is sufficient demand to justify their reopening.

In Chile, the Group is hopeful that its operations will reopen in the near future, but all bets are off in Peru and Argentina.

No dividend has been declared. BM/DM

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