Chief executive and management report continued

OUR APPROACH TO OUR BUSINESS


  • Protect and leverage our existing asset portfolio
    We have a diverse portfolio of assets including world class five star hotels, modern and well located casinos, some of the world’s premier resorts and some older legacy assets that for various reasons may not be positioned favourably any more. In evaluating our portfolio we have identified those properties that can be better leveraged, those that need protection and those that may no longer be core to our strategy.

 

During the past year we spent a significant amount of time strategically analysing our existing assets and have announced certain transactions and developments which we believe will assist in maximising the potential of our portfolio. The transactions concluded and announced are in various stages of implementation. Shareholder approval, where required, has been obtained and it is largely regulatory approvals that are outstanding. While our primary focus is on executing the transactions already announced, we continue to evaluate other opportunities to better leverage our assets and believe there are a number which will hopefully come to fruition in the year ahead.

GrandWest

There have been no further developments in the amendment of regional licence allocation policy and legislation to allow for the relocation of a licence in the Cape Metropole region. We still believe that there is no potential for significant additional gaming revenue to be had in the region to justify establishing another large casino in the catchment area of the city.

On 13 May 2014, the Group announced that it had concluded a transaction which will see GPI exit its investments in SunWest and Worcester. Tsogo will acquire a 40% shareholding in both properties including the acquisition from Sun International of a 14.9% interest in each of SunWest and Worcester for a combined cash consideration of R635 million. GPI has, since inception, been the primary BEE stakeholder in SunWest and Worcester and wishes to monetise its stake in these assets to pursue other interests. Tsogo has limited exposure to the Western Cape metropolitan markets and wishes to increase its presence in this market.

Sun International and GPI are of the considered view that Tsogo is the only party that can provide similar BEE ownership credentials to that of GPI, and furthermore, Tsogo has the financial capability to implement a transaction of this magnitude.

Sun International and its employee share trust will own 60% of SunWest and Worcester and will continue to control and consolidate these assets. Tsogo will have representation on the board of directors of SunWest and Worcester with typical minority shareholder protections. All operations will continue to be managed by Sun International Management Limited under each of its existing management contracts.

The proposed transaction is subject to competition commission and gambling board approval and the relevant submissions have been made. Shareholders voted in favour of the transaction at the general meeting held on 22 August 2014.

We believe that this deal is in the best long-term interest of SunWest and Worcester. The R635 million proceeds to be received will be useful in funding the Group’s expansion plans and from an empowerment perspective, we are especially pleased with the R2.2 billion value created for GPI.

Monticello

As announced on SENS on 2 July 2014, Sun International reached agreement to acquire a further 54.7% interest in Monticello for approximately US$114 million on 30 June 2014. This gives the Group an effective 98.9% interest. In addition, Sun International will acquire shareholder loans and cash of approximately US$32 million.

The transaction provides the opportunity for Sun International to acquire an increased economic interest in, and gain strategic control over, what is regarded as one of Latin America’s best casinos. The transaction acts as a catalyst for establishing a portfolio of premier assets in the region as well as providing the platform for further growth and consolidation of Sun International’s strategic position in the casino industry.

Shareholder approval was received on 29 September 2014 and the purchase is now subject only to Chilean Gambling Board approval, for which the relevant submission has been made.

An accrual of R1 687 million has been raised in non current liabilities for the purchase consideration.

From an operational point of view we have had to take some swift and significant action during the year to mitigate the negative impact of the smoking ban introduced early in 2013. We downsized the work force to match the lower levels of revenue and four smoking decks with slot machines have been constructed allowing natural airflow and complying with the anti-smoking legislation. Our approach was to create an environment of comparable quality and experience with the non-smoking areas of the casino and this has been well-received by the Santiago market.

Since the opening of these decks, coupled with improved marketing focus, revenues have improved steadily. In March to June 2014, gaming revenue was up 23% on the prior year (the first four months subject to the smoking ban).

We are pleased to report that our market share in Santiago has climbed from 65% to over 70% over the course of 2014, a pleasing result for an asset that is critical to our Latin American strategy.

Sun City

The R300 million refurbishment of the Sun City phase 1 Vacation Club is well under way with R179 million spent and an expected completion date of November 2014. Sales of Vacation Club units of R105 million were achieved by 30 June 2014. With the completed units we now have the ability to offer “try and buy” options which should expedite sales and we have secured retail financing for prospective clients.

Sales and marketing teams for the Vacation Club have been established as well as marketing offices in Johannesburg and on-site at Sun City.

A long overdue R100 million refurbishment of the popular Cabanas hotel will also commence shortly and will be phased over the next two financial years. Further plans for the resort, in particular the convention and conferencing aspects of the business, are under consideration. Capacity not sold in the Vacation Club will be utilised by Cabana clients helping offset any loss of revenue during the refurbishment.


 


With encouraging growth in casino revenue we have commenced the refurbishment of the main casino at an estimated cost of R50 million. The refurbishment includes a significant modernisation of the casino floor and the development of food and beverage outlets in and around the casino to improve the gaming and entertainment experience. The refurbishment will be completed in time for the 2014 Nedbank Golf Challenge.

Morula relocation to Menlyn Maine

During April 2014, public hearings were held in relation to the Group’s application to amend its Morula licence to allow the relocation to Menlyn Maine on the east side of Pretoria. On 31 July 2014, the Gauteng Gambling Board (GGB) announced that the Group’s application had been approved thereby permitting the relocation of the casino from Mabopane to Menlyn. The approval is subject to conditions that are reflective of the commitments made in the application.

Detailed planning of the R3 billion development will now commence in conjunction with further engagement with the GGB to conclude detailed agreements for the amendment of the Morula licence conditions.

Notification has been received of certain legal objections to the proposed relocation and development and these are being addressed. Once the amendments to the Morula licence are issued by the GGB and in the absence of any legal impediment the detailed planning and construction of the casino is anticipated to take approximately 30 months.

Rest of Africa

We indicated in last year’s report that Africa did not present many opportunities for the development of sizeable casinos and against this background we have been evaluating our existing presence on the continent. As announced on SENS on 18 August 2014, Sun International has now entered into agreements with Minor, whereby Sun International will dispose of a significant portion of its African portfolio to Minor. The interests Sun International will dispose of and its shareholding pre and post the transaction are set out in the table below:

Sun International’s effective ownership

  Before the transaction   % disposed   After the transaction  
Gaborone Sun – Botswana   80%   80%   16%  
Kalahari Sands – Namibia   100%   80%   20%  
Lesotho Sun and Maseru Sun – Lesotho   47%   80%   9%  
Royal Swazi and Ezulwini Sun – Swaziland   51%   80%   10%  
Royal Livingstone and Zambezi Sun – Zambia   100%   50%   50%  

On conclusion of the transaction, the Royal Livingstone and Zambezi Sun will be accounted for as a joint venture, Gaborone Sun and Kalahari Sands as associates and Lesotho Sun, Maseru Sun, Royal Swazi and Ezulwini Sun as available-for-sale assets. The collective purchase consideration amounts to R664 million plus the face value of any shareholder loans.

Sun International will continue to manage the casino operations situated at each of the assets and Minor will assume day-to-day management responsibility for the hotel operations other than in Zambia, which will be jointly managed. The agreements reached cater for a sharing of management fees, the marketing of the properties, and the provision by Sun International of support services.

In parallel with our discussions with Minor, and with their approval, we have finalised the scope of the Zambezi Sun refurbishment, which is budgeted at R130 million and commenced in June 2014. In Nigeria, we have created a master plan for the development of the real estate and the Towers hotel. We continue to try and resolve certain shareholder disputes and regulatory issues before we can progress further with the development. The Minor group has expressed an interest in participating in Nigeria and investing into the property and these discussions are being fleshed out. The environment in Nigeria is however extremely challenging and the recent outbreak of Ebola will negatively impact the performance of the property in the 2015 year.

Why choose Minor International Pcl as a strategic partner in Africa?

From its founding in 1978 with a single beachfront resort in Pattaya, Minor is today one of the largest hospitality and leisure companies in the Asia Pacific region. With over 100 hotels and resorts, 1 500 restaurants and 250 retail trading outlets, Minor meets the growing needs of consumers in Thailand and in 25 markets from Africa to Australia.

Through its hotel operations, Minor has a portfolio of over 14 000 rooms under the Anantara, AVANI, Per AQUUM, Oaks, Elewana, Four Seasons, Marriott, St. Regis and Minor International brands. Its restaurants division is one of Asia’s largest casual dining and quick-service restaurant companies, operating in 20 countries under The Pizza Company, Thai Express, The Coffee Club, Ribs and Rumps, Riverside, Swensen’s, Sizzler, Dairy Queen and Burger King.

It is also one of Thailand’s largest distributors of lifestyle brands with over 250 points of sale focusing primarily on fashion and cosmetics.

The deal with Sun International gives Minor greater access to hotel opportunities in southern Africa. With Minor’s balance sheet strength and Sun International’s existing relationships and understanding of these markets, we see the deal as an ideal opportunity to service and improve the offerings in these countries while rightsizing our interest in these African assets to align with our strategy.

There is strong rapport between the management and chairmen of the two groups, with the relationship built up over the course of the year. We look forward to working closely with Minor. Starting with the existing African assets, it is the intention of the alliance to explore other hotel and gaming opportunities that may arise, particularly in Africa and Asia.