Will Star be deemed ‘too important’ to Sydney’s economy to cease operating?

Investors could be forgiven for scratching their heads wondering if Star Entertainment (ASX: SGR) is any worse off following recent rulings that it is unsuitable to hold a NSW casino licence.

While there appears to be no clear pathway on how Star can achieve that suitability, Macquarie’s Outperform rating and $3.50 target remain unchanged.

For those that have overlooked recent developments, Macquarie decided not to downgrade Star, despite a Bell inquiry which concluded within its 907-page findings that the Star Sydney – which comprises 54% of group earnings - had engaged in a laundry-list of deceptive and unethical practices.

The Bell inquiry concluded that the company was unfit to hold a casino licence after misleading banks and investors, evading taxes, lacking controls and compliance with anti-money laundering regulations.

In an attempt to soften the market’s reaction, Star entered into a trading halt on Monday before the regulator’s ‘unsuitable to hold a licence’ decision was announced.

What happens next?

The casino regulator will only decide what it wants to do next, after Star responds to the notice over the next two weeks, presumably with reasons why it should be allowed to continue operating.

While disciplinary action is expected to be compliance focused rather than punitive, there’s no absolute certainty that loss of licence will eventuate.

The $64,000 question is whether Star will be able to keep its doors open due to the size of the company’s contribution to the NSW economy.

The disciplinary action currently being considered includes:

• Cancellation or suspension of license

• Imposition of a pecuniary penalty of up to $100m

• Amendment of the terms and conditions of license or requirement that the operator maybe refrained from doing certain things

• Issue of a letter of censure to the casino operator

Is Star too big to fail?

With so many different interests to be considered, Geoffrey Watson, a director at the Centre for Public Integrity compared Star to the “too big to fail” argument in favour of bank bailouts during the global financial crisis.

“The conclusion and closing of licence would affect so many people who are innocent of any wrongdoing like frontline employees and shareholders,” Watson noted.

However, investors should remember that NSW regulators proved they weren’t completely toothless when they banned Crown (ASX: CWN) from opening its new waterfront casino in Barangaroo for 16 months.

Crown recently received a provisional permit to open with a monitor similar to the ones mandated in Victoria and WA, and Star may end up receiving similar treatment.

Arrogant and closed off

In a letter to shareholders, interim chairman Ben Heap reassured the market that the arrogance and indifference to criticism displayed by management in the past will not continue.

Heap also reassured shareholders that management is developing a comprehensive remediation plan to serve as an integrated roadmap for improving governance, culture and controls.

Star is expected to make stronger efforts to change processes and compliance checks, restrict cash on the gambling floor, limit the effects of problem gambling by putting time limits on pokies.

Heap’s letter appears to have curried market favour with the share price up around 3% at the close yesterday, and up 3% at noon today.

Heap’s letter to the market yesterday follows Star reassurances to the Bell inquiry that a significant reform agenda was already under way following the departure of key executives and major board restructuring.

Star Entertainment share price over 12 months.