HONG KONG (Reuters Breakingviews) - The odds are quickly changing in the Crown Resorts takeover saga. Smaller Australian casino operator The Star Entertainment on Monday proposed a merger valuing its embattled rival at A$9 billion ($7.1 billion), including synergies. It's a deal loaded with assumptions about benefits that would take time to materialise. Even so, Blackstone will be pressured to sweeten its own rival bid yet again.    

Star's plan is more complicated than the one pitched by the private equity firm. It's a nil-premium all-stock entreaty, with an option to buy up to 25% of Crown shares in cash at A$12.50 apiece. Star reckons cost savings add up to another $1.6 billion. Some 59% of that benefit would accrue to Crown owners under the hybrid cash-and-stock structure. Blackstone on the same day hiked its conditional offer about 4% to A$12.35 a share.

Merging Star and Crown holds some appeal. Although the suitor targets a lower end of the market, it knows the industry and regulators well. With a bigger balance sheet at its disposal, it might be better placed to court high rollers from overseas.

The plan is ambitious, however. For one, Star is flattering the present value of about A$175 million of envisaged annual cost savings by capitalising it aggressively on a blended 18 times price-to-earnings multiple of the two companies. Antitrust authorities say they will scrutinise a combination of the two big rivals. And a mooted sale-and-leaseback strategy, where Star would sell off properties and rent them back again, could be tricky to implement in the gambling business.

There is also the sticky question of James Packer, Crown's founder and 37% owner. Star's capped cash component limits its debt burden but implies he would continue to be a shareholder. Although he has been sidelined by regulators, it creates an awkward situation.

Star shares increased 7%, suggesting shareholders see some merits. Crown's vaulted to A$13. Blackstone offers more certainty with its all-cash takeover, but also is awaiting approval from gaming authorities that it would be a suitable owner. Like Crown shareholders, it will have to have recalculate the probabilities of being third-time lucky.

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CONTEXT NEWS

- Australian casino operator The Star Entertainment said on May 10 that it has made a conditional offer to merge with Crown Resorts in a nil-premium, all-stock deal that values its embattled larger rival at about A$7.1 billion ($5.6 billion) using the closing share prices of both companies on May 7. Star's proposal includes an optional component to buy up to 25% of Crown shares for A$12.50 each in cash.

- Private equity firm Blackstone on May 10 also sweetened its earlier all-cash conditional offer to buy Crown by about 4%, to A$12.35 a share from A$11.85.

- Separately, Crown on May 10 said it had appointed Steve McCann, the chief executive of property developer and investment firm Lendlease, to be its CEO.

- Star's stock-based offer of 2.68 of its own shares for each Crown share would leave its own shareholders with 34% of the combined company and Crown shareholders with the rest. If the cash component is taken up, Star shareholders would hold 41% and Crown's 59%.

- Star said it expects to generate between A$150 million and A$200 million of cost savings from the deal with an estimated net value of A$2 billion after capitalising them at a blended price-to-earnings multiple of 18 times and deducting an estimated A$250 million of transaction and integration costs.

- For previous columns by the authors, Reuters customers can click on [HAMLIN/] and [GOLDFARB/]

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Column by Katrina Hamlin in Hong Kong, Jeffrey Goldfarb in Melbourne. Editing by Una Galani and Katrina Hamlin)

By Katrina Hamlin and Jeffrey Goldfarb