KEY POINTS:
For the best part of a decade after the company opened its flagship Auckland casino, Sky City enjoyed an extended honeymoon among the not inconsiderable number of investors happy to own a slice of what is surely the New Zealand market's only true "sin stock".
Even before it opened for business in 1996, the company was headed by former Brierley Properties executive Evan Davies, who until Monday was perhaps the longest serving chief of any leading listed company in New Zealand.
But thanks to Sky City's less-than-stellar performance over the past two or three years, Davies' hold on the job had looked increasingly weak.
Under his leadership the company made a string of debt funded acquisitions including casinos in Adelaide and Darwin, and a chain of cinemas which for the most part have failed to fire. On top of that, the smoking ban and tougher gaming regulations have affected revenue from the Auckland operation and the sharemarket's darling's allure has now faded badly.
While it has maintained respectable dividend payouts, its share price has languished.
At the end of June three years ago, its shares were trading at $4.45, immediately before Davies "stepped down" this week, they were at $5.01. The stock closed up 7c yesterday at $5.08.
Over the past three years it has produced a total return of 38 per cent against the benchmark index's 58 per cent over the same period.
"If you got in there three years ago you'd be feeling pretty miffed," says Shane Solly of Mint Asset Management.
"But if you got in there in 2001 you would have been up 220 per cent versus 120 per cent for the market over the same time."
Institutional shareholders and a number of commentators have made no secret of their dissatisfaction with the company's recent direction and Davies' leadership, especially after a dismal first half result earlier this year and a substantial profit downgrade. In response, Davies last month announced a plan to cut $33 million in costs over the next 12 to 18 months, cut 230 jobs and sell underperforming assets.
But achieving all of that was only going to result in the company meeting its lower revised earnings guidance.
One analyst described that as "the greatest Houdini trick I've ever seen".
Without the cost savings and asset sales, the company would have a hard time meeting even its revised expectations over the next couple of years, sentiment towards the former market darling would sour even further, and Davies, after 11 years in charge, would be out on his ear. As it happened this week, Davies was out anyway.
In itself, given the company's performance and the obvious pressure on him to go, that is unsurprising.
But the suddenness of his departure, without a ready successor and amid the murk that has engulfed New Zealand's casino industry, has understandably sparked speculation.
Further fuel has been added by the lack of detail in explanations from Sky City's chairman Rod McGeoch and his deputy Patsy Reddy.
The board had decided it was time for a leadership change, said McGeoch, "to which he [Davies] agreed". Reddy said there was "no particular event" that precipitated Davies' departure.
But ABN Amro analyst Carolyn Holmes said in a report: "We wonder whether the recent press reports on the investigation into loan sharking at New Zealand casinos and the investigation into the Christchurch casino ... have also played a part in Davies' speedy departure."
Furthermore, just as Green MP Sue Bradford was calling for a public inquiry into links between casinos and "organised crime" such as loan sharks, Sky City's head of government relations and policy, David Kennedy, lost his job too.
According to an email from Davies to senior staff, obtained by the Business Herald, Kennedy resigned. Reddy said he was made redundant as part of the strategic review, although she couldn't say whether it was voluntary or not.
However, the Business Herald understands Kennedy was fired by Davies, literally moments after he went to him with some cost cutting plans of his own.
But Reddy said the alleged loan sharking at Auckland Casino had "categorically not" had anything do with Davies leaving the company.
Furthermore, she wasn't "aware of any such activity in Auckland that management were aware of".
Davies and the board simply reached a "mutual agreement" that "a new chief executive would bring fresh energy and a fresh look at the business".
Once that decision was reached, Davies chose not to hang around to help his immediate successor, long serving director Elmar Toime, ease into the job of acting chief executive.
He declined the option of serving out a three-month notice period which would have taken him at least to the company's annual result in August.
So where does that leave the business? One or two analysts, including Macquarie Equities' Steve Wheen, believe the strategic changes announced by the company last month were to a large extent Davies' baby, and his departure presents the new chief executive with something of a hospital pass.
Given the cost savings were necessary just to meet the company's guidance, any hesitation or problems in execution could see the company fall short.
Wheen already believed the company had narrowly avoided having to downgrade its 2007 earnings guidance, due to "a run of luck" at its Auckland VIP gambling operation during the second half.
McGeoch and Reddy were a lot more definitive on the prospect the company may be forced to issue an earnings downgrade
"There's absolutely no foundation for that sort of inference to be drawn," said McGeoch.
Reddy said the strategic changes had been "formulated by the entire management team", and the pace of implementation would not be affected by Davies' departure.
While there are at least some reservations about the company's ability to deliver on its cost cutting and asset sale plans in a timely fashion, there is a general consensus this is the right move for Sky City.
"It seems like a commonsense approach to me," said Forsyth Barr analyst Jeremy Simpson.
"The Auckland casino is still a very powerful business and there's no reason why that can't continue to be powerful. To me, that's the key value driver.
"The opportunity is there with this big refurbishment, getting a bit tighter on costs and looking after core customers better through the facilities and the loyalty programmes."
"We think the changes are good," said Shane Solly of Mint Asset Management.
"When the company was focused on Auckland, it was extremely cash generative and obviously that was a pretty exciting time, people were seeing this business ramp up.
"I think you've got the potential for a similar outcome here, if they go back to being a pure exposure again."
Meanwhile, of the assets under review, Simpson says the Adelaide casino has been perhaps the biggest blot on the company's copybook.
"It has been tougher than they initially expected. There's pretty solid competition in Adelaide from the club market and also the market is, it's fair to say, not as dynamic as Auckland. It's a relatively conservative Anglo-Saxon population, it doesn't have the large Asian element that Auckland or Sydney has."
To some extent, it's a familiar story. "It's not unusual for a New Zealand company to underestimate the Australian market."
On the other hand, Simpson says the Darwin casino has been a hugely successful acquisition and he also rates the Hamilton casino as a successful development.
ABN Amro's Holmes says divestment of the Adelaide and Christchurch casinos and the cinemas at "fair prices" would lift her firm's valuation of Sky City from $5.74 a share now to $5.94, rising to more than $6.30 a share if it sold its Auckland hotel and conference centre, but retained the casino.
And in an encouraging sign, the company is believed to have received some unsolicited offers for some of the assets.
"Obviously when you announce something like that, all sorts of interest comes out of the woodwork," said Reddy. The company will update the market on its asset review when it releases its full year result in mid August.
The company's shares are likely to find some support from its ongoing takeover potential.
Stephen Wright of ASB Securities says Davies' departure before a permanent successor is appointed opens up "a bit of a void. Maybe it opens up an opportunity for a predator".
Much of the takeover speculation has focused on the prospect of a bid from Australian rivals such as Unitab or James Packer's Publishing and Broadcasting. Simpson, who views the company as having potential for corporate activity over the medium term, says private equity outfits may also be interested.
However, Wheen believes the debt the company has racked up during its acquisitive phase means there is not a great deal of further gearing a potential private equity bidder could saddle the company with.
Furthermore, he sees risks that should the New Zealand sharemarket darling be captured by overseas owners, it would be "a pretty easy win" for the Government to raise the comparatively low gaming tax rate.
Assuming Sky City isn't captured by private equity or another rival, and that it emerges unscathed from loan sharking allegations, analysts say it stands a pretty good chance of recapturing much of its past glory.
"It will take some time for the board and management to deliver on what they've indicated and there is potential for hiccups," said Mint's Solly. "But if they do deliver we're certainly looking at a far more compelling business than it has been for the last three years."
