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Star’s proposed $9.4bn merger with casino group comes as Blackstone sweetens terms

Australian casino company Star Entertainment Group has proposed a merger with under pressure rival Crown Resorts, setting up a bidding war with US private equity investor Blackstone.

Star said on Monday its all-stock offer for Crown would create a A$12bn (US$9.4bn) entertainment and tourism business listed on the Australian stock exchange and unlock up to A$200m in annual savings for the combined group.

The proposal from Star was announced minutes after Crown disclosed that Blackstone had boosted its takeover offer by 50 cents per share to A$12.35 per share, making it a potential A$8.3bn transaction.

Crown, Australia’s biggest casino company by market capitalisation, said it was reviewing both proposals.

The fight over Crown was initiated by regulatory problems at the group, which a government-commissioned inquiry found had facilitated money laundering at its casinos.

Shares in Crown, whose biggest shareholder is Australian billionaire James Packer, jumped more than 7 per cent on Monday to their highest level in almost two years as investors anticipated a battle for control of the group.

“You’ve got companies circling Crown, albeit in very different ways, looking to capitalise on pessimism which we think was overblown,” said Angus Hewitt, an analyst at research company Morningstar.

Packer will be pivotal to any agreement. He has signalled that he was willing to sell in light of the regulatory hurdles facing Crown and his personal circumstances.

The billionaire resigned from Crown’s board of directors in 2018, citing mental health issues.

A year earlier, 19 of the group’s employees were convicted of gambling offences in China. The Australian government inquiry into Crown, which was published in February, criticised Packer and said his capacity to “remotely manoeuvre” operations must cease for the health of the company.

Crown, which owns casinos and hotel resorts in Sydney, Melbourne and Perth, has also attracted a third suitor. US investment fund Oaktree Capital has offered to loan Crown A$3bn to buy back 37 per cent of its own shares, which are owned by Packer’s private investment vehicle, Consolidated Press Holdings.

Analysts have speculated about the merits of a tie-up between Star and Crown for several years, although there may be regulatory hurdles regarding the impact on competition and the need to amend the former’s casino licences.

Rod Sims, chair of the Australian Competition and Consumer Commission, said on Monday the watchdog would conduct a public review in the event of any deal.

Star is offering 2.68 of its shares for each Crown stock under its proposal, which it said implies a value of A$14 per share. It has also offered a cash alternative of A$12.50 per share for as much as 25 per cent of Crown’s issued shares.

Kelly Amato, an analyst at Fitch Ratings, said a merger would limit the amount of additional debt the new entity would need to take on.

“The proposed creation of a property trust would give the new entity additional flexibility to manage its capital structure post-transaction,” she said.

Simon Windsor began his career in digital marketing. While working as head of mobile at the creative agency Five by Five, the launch of the iPhone shifted his perception of how content could evolve creatively through technologies.

“The idea of the physical and virtual bleeding increasingly together, the idea of the metaverse — I started to think, this is going to lead into a new era for content creators, a new era for storytellers, and leveraging the capabilities of mixed reality and computer vision,” Windsor told BoF.

In 2011, Windsor left Five by Five to become director of customer development at String — whose clients included Nike, Skechers, Disney, Audi, Paramount, and Microsoft. It was one of the first augmented reality technology platforms for mobile, experimenting with how to bring 3D content into the physical world using first-generation smartphones.

Windsor proceeded to co-found mixed reality company Tmrw and then virtual reality and immersive content studio Hammerhead, which since became Dimension Studio, where he is currently joint managing director and an executive producer. He has worked on fashion and entertainment projects including AR holograms for Madonna’s Billboard Music Awards 2019 performance, Virtual Vikings for Ridley Scott Creative Group and digital humans in Balenciaga’s Afterworld: The Age of Tomorrow — a futuristic fusion of volumetric capture and video gaming — as well as H&M and Simone Rocha’s AR pop-up book. He now shares his career advice.

I think Balenciaga’s just scratching the surface of what virtual fashion worlds and shows might become. We’re just at the tipping point of this new era. 5G, AI, the fact that we have cameras on our handsets and computer vision capabilities are being introduced through new iPhones — it gets really interesting, especially the way in which fashion brands can engage audiences. It starts to change the meaning of fashion itself.

The idea of digital identity, virtual fashion, NFTs, companies such as Epic with Unreal Engine, are changing the rules around content creation. This means, in the future, people will be able to create their own story worlds at home, where you’d normally have relied on a big VFX team in Hollywood to produce. We’re moving away from an era of passive experiences into richer, more immersive content and ways in which you can engage with brands’ stories, where you have more agency as a user and where that content coexists in your physical space.

My background is within digital marketing agencies. The introduction of the first iPhone was pivotal for me, looking at how content could evolve creatively using technologies. The idea of the physical and virtual bleeding increasingly together, the idea of the metaverse, fascinated me early on, mainly inspired by lots of classic sci-fi films and the usual references.

In 2011, I became part of a team that launched one of the first mobile augmented reality technology platforms, String. We were experimenting with how to bring 3D content into the real world using first-generation smartphones such as the iPhone 3GS. That moment was pivotal to me in terms of appreciating where content would start to go.

I’ve spent the last 10 years looking at how mixed reality technologies can inform and empower storytellers and creatives to explore new mediums and bring conceptual story worlds to life, in the world of fashion and other areas of entertainment.

Primarily, my role has remained that of a producer. I’ve always been about discovering ways to make things happen. If you work in agencies, you get a brief that is normally, “We want to do something new,” and that’s what we would work on.

In the case of early mobile, it was, “How do we engage consumers in new ways? What’s going to be innovative about this application that means we can deliver more value to our audience, whether it’s through utility or entertainment?” Ultimately, it’s still underpinned by strong storytellers and people with great ideas to bring these to life.

My attitude towards producing involves thinking creatively around the problem. For me, it’s about the convergence of creative and story worlds with technology, to support the creation of ever more compelling, exciting and interesting ways in which brands can tell their stories.

We worked early on with brands such as Nike for virtual try-ons on digital fashion configurators around the Air Jordans. It was experimental, starting to understand what you could do creatively with the medium and what it meant for digital fashion and how that drove new levels of engagement for users.

Fashion is great for creating conceptual story worlds. Now that they have the tools and emerging technologies at their disposal, they can begin experimenting with what that means for us in the virtual space. The only limit creatively these days is our imagination.

Making great things happen comes down to collaboration with others and working as a team — and that could be working with peers, mentors or it could be finding ways to gain work experience. You can then glean a lot of information and knowledge to help you advance in the early stages of your career. That comes through hunger — to want to make things happen.

Being immersed in what’s happening in the space and connecting with other people. That’s the same whether you’re starting out in your first role or you’re 10 years into what you do — you have to remain fresh and relevant. These days, it’s far easier to connect [with others] if you’ve got an area of passion — identify the movers and shakers in the space, whether it’s through social media or attending events. There’s a lot more channels at your disposal to improve knowledge, connect and follow others.

As creatives who are all exploring this space together, we benefit and feed off of each other. For the Balenciaga project, around 10 companies were involved in making that happen. Each of those companies were responsible for driving innovation in their own space. The digital humans we created at Dimension Studio came from seven years of R&D into that specific volumetric video suite.

Those interested in digital fashion and what the future of working in the fashion industry looks like, should look towards technology and what some of the leading fashion companies are starting to do with it. The barriers of entry are going to decrease and I expect more companies will start to adopt augmented reality or virtual reality to create content and stories in new ways.

You need to accept that change is constant. You need to be open-minded to the fact that change is ever-present. Therefore, we have to accept that on almost every brief and production we work on, there’s an aspect of embracing the unknown and doing something innovative.

One of the things that is critical is detail. Typically, in the world of creativity and production, we talk about the last 5 or 10 percent being the most important. In the process of experimentation, things won’t always be perfect, but where it really matters, in those percentages — that’s where you need to have an eye for detail, because that’s what distinguishes the good from the really good.

Increasingly, we see high-profile, high-quality candidates coming from university or college using software and tools at their disposal, but they’re going one step further. It bleeds into becoming a hobby. We’ve got a whole generation playing Fortnite, who have been styling avatars and buying skins for a while now. You see what’s happening with NFTs and companies like RTFKT and The Fabricant.

These days, [emerging talent] has access to software, tutorials online, people who are doing cool things in the space for inspiration. I don’t think there’s any lack of capability or resource to enable talent to thrive and demonstrate they’re good. If you’re passionate about something, there’s no reason why you can’t invest your time in providing compelling reasons why companies should be interested in working with you.

Luca Solca calculates the size of the fashion platform’s total addressable market and its projected share of this market by the end of 2025.

After a blockbuster 2020, in which Farfetch surged ahead of rivals, it’s time to look at the long-term potential of the fashion platform described by the size of its total addressable market and projected share of this market by the end of 2025.

To do this, we can start with Altagamma’s definition of the personal luxury goods market and its scale in 2019, then plug in a 6 percent annual growth rate over 6 years. This gives us a projected size for the total personal luxury goods market in 2025 of €400 billion.

This seems generous enough, as it assumes that the 22 percent plunge caused by Covid-19 in 2020 can be entirely recaptured over the period and implies that the personal luxury goods market could move back to the long-term growth trend of 6 percent per year, reported by Altagamma over the past 20 years.

Of course, Farfetch is a digital player primarily focused on fashion and leather goods. And we assume that by the end of 2025, digital sales will make up 30 percent of the personal luxury goods market, while fashion and leather goods will be worth about 51 percent.

But here’s where things become more complicated. How much inventory will soft luxury brands actually commit to multi-brand digital platforms like Farfetch? That depends.

Top-tier brands like Louis Vuitton, Dior, Chanel and Hermès are already 100-percent focused on direct-to-consumer distribution and will be unlikely to commit any material inventory to multi-brand digital platforms for the simple reason that any inventory commitment would effectively compete against their own distribution, reducing their e-commerce development and — even worse — diluting their retail space productivity. We know this would be a kiss of death, as sales per square foot is correlated with return on invested capital (ROIC), and ROIC trends are correlated with total shareholder return.

These top-tier brands could be interested in using multi-brand digital distributors as a customer recruiting tool. With this in mind, they could conceivably commit a small amount of inventory to these platforms, while demanding high visibility and full transparency on consumer data, the goal being to capture new recruits and shift them to direct channels in due course. To be sure, platforms like Farfetch may be tempted by the traffic generation potential of such deals, as well as the image enhancement they would bring, but we would likely see little advantage in their economics.

Top-tier brands have grown at a higher rate than the market average. Growth of 10 to 12 percent per year from 2019 to 2025 would make them worth €40 billion to €50 billion, or about 25 percent of the soft luxury market, by the end of the period. This is a slice of the market Farfetch won’t capture.

Second-tier brands such as Gucci, Prada, Moncler, Burberry, Valentino and Dolce & Gabbana, with about 80 percent direct-to-customer distribution may be more eager but have a “commitment ceiling.” To be sure, they have an interest in driving down wholesale (and grey market) exposure they tolerated prior to the digital revolution. Here, e-concessions à la Farfetch can help. And yet wholesale (and grey market) inventory spills over onto Farfetch, which first recruited multi-brand boutiques to the platform, putting brands into competition with their own wholesale customers, which often sell at a discount.

By committing directly to platforms (and cutting wholesale volumes), second-tier brands kill two birds with one stone: (1) they increase price execution discipline (as they align marketplace prices to their own brand.cn/com and directly operated store prices); (2) they materially improve their economics.

But second-tier brands would have to recapture less than 50 percent of their wholesale and grey market volumes through e-concessions to reach break-even point. And once second-tier brands have cut their wholesale and grey market exposure, they would be in the same situation as top-tier brands: any further inventory commitment to platforms like Farfetch would compete against their own direct-to-consumer distribution. We would expect, therefore, that at this point they would hit a “ceiling.”

By the end of 2025, second-tier brands could be worth as much as top-tier brands: €50 billion. Non-DTC sales are likely to make up about 20 percent of this. With online representing 30 percent of the market by then, Farfetch’s total addressable market with second-tier brands would be about €3 billion.

Below tier two, brands seem eager to find traffic and sales whatever the channel. These lower-tier labels have seen their traditional wholesale distribution crumble over the past 20 years: department store chains have gone bankrupt, and independent multi-brand boutiques have exited the market in droves. But they have little option to build directly operated store networks, as they would struggle to generate sufficient sales densities to make them profitable in prime locations

They are the “long tail” of the industry, and they are likely to play ball with anyone offering incremental revenues. But this also makes them more open to Farfetch competitors. Second-tier brands are choosy and prefer Farfetch; more minor brands are likely to play with anyone offering a glimpse of extra sales volumes, even internet giants like Amazon and Facebook, which are moving into high-end distribution.

We assume that these lower-tier brands make up 50 percent of the market, accounting for €100 billion in 2025 sales. We take 75 percent of that as non-direct. And again, with online representing 30 percent of sales by then, Farfetch’s total addressable market in this segment is about €23 billion.

Farfetch has big ambitions in beauty. We expect the category to account for about 21 percent of the total luxury market or about €85 billion in 2025, 75 percent of this generated via non-DTC channels. We expect higher online penetration in beauty than soft luxury: 45 percent. Therefore, Farfetch’s total addressable market in beauty is about 33.75 percent of the wider beauty market or €28 billion.

But beauty is a new focus for Farfetch. And with several players already present in this space, from incumbent retailers moving online like Sephora to newly developed specialist marketplaces like Cult Beauty, it’s safe to assume Farfetch’s market share in beauty will remain lower than in soft luxury.

The hard luxury market will be worth 21 percent of the total luxury market in 2025. But luxury brands in jewellery (take the top four as examples: Cartier, Van Cleef & Arpels, Tiffany and Bulgari) are already 100 percent integrated into retail, and their move online is happening with the same DTC logic.

Watches are the opposite, however, with brands still heavily dependent on multi-brand wholesale clients. And yet, go-to marketplaces for watches already exist, with Chrono24 ahead of the pack. Hard luxury groups are moving in, like Richemont with Watchfinder. And Farfetch currently has little to show in this space. As a result, we expect negligible organic market share for Farfetch in hard luxury (though M&A is an option).

Taking this altogether, Farfetch’s total addressable market across all segments could be around €63 billion by the end of 2025, or 16 percent of the total personal luxury goods market.

Of this, we expect Farfetch’s market share to be 33 percent of the indirect digital fashion and leather goods market, 10 percent of the beauty market and a negligible slice of hard luxury. That adds up to about 18 percent of its total addressable market, with a gross merchandise volume above €11 billion.