UPDATE 11.55am: Casino operator and takeover target Echo Entertainment Group has flagged a big, discounted capital raising as it issued a full-year profit warning on the back of weak consumer sentiment.
Echo, which runs The Star casino in Sydney and three casinos in Sydney, said it expected to report earnings of between $270 million and $315 million for the year to June 30, which would be down from $347 million in the previous financial year.
The change represents a 39 per cent drop in full-year profit.
"Trading conditions have remained difficult in (the second half of financial year 2012) with revenues negatively affected by soft consumer sentiment," Echo said in a statement.
The forecast was provided as the company announced a rights issue to raise up to $454 million to pay down debt and strengthen its balance sheet.
Echo will offer one new share for every five held by existing shareholders, at a price of $3.30 per new share.
Echo's major shareholder, rival casino operator Crown, would take up its full entitlement offer, but would not increase its 10 per cent stake, Echo said.
Echo chief executive Larry Mullin said the funds raised would provide a capital structure that would support the company's VIP rebate business, which supports regular, large value gamblers.
"The entitlement offer announced today will reduce gearing, help ensure a more appropriate capital structure and maintain financial flexibility for the company," he said.
Echo also said it was in talks with its lenders to modify the terms of its loans to ensure they are maintained.
Last month, Echo said it would book a writedown of $29.9 million in its full year accounts associated with its international high-rollers business.
One of Echo's partners in attracting VIP players, SilkStar Global Marketing, had been placed in liquidation in March and had not repaid $7 million that Echo had provided in development fees and prepaid commissions.
Fat Prophets analyst Greg Fraser said the capital raising came at a time when the domestic consumer environment was weak and Echo has already spent a large amount of money upgrading its Sydney casino, The Star, and intends to refurbish its Queensland casinos.
"You could argue that their timing has been a little unfortunate, and they're not going to very quickly see any strong return on that investment,” Mr Fraser said.
Echo's experience with SilkStar suggested that Echo had either not been very good at managing its VIP business or that it was struggling to make any great headway into the lucrative high-rollers market in Asia, he said.
Mr Fraser said The Star casino had potential and Echo needed some help in managing its VIP business.
Whether Crown might be able to convince the Echo board and management to do things in a better way remained to be seen.
"The Echo people will understandably be wary of Crown's intentions and won't want to be seen to be yielding to their influence because that would be perceived as Crown having control of Echo for just 10 per cent of the equity,” Mr Fraser said.
Last week, Echo's chairman John Story resigned after a move by Crown to have him replaced with former Victorian premier Jeff Kennett.
Crown has since dropped its move to install Mr Kennett with Echo appointing board member John O'Neill as chairman.
It also emerged last week that Asian casino giant Genting had bought a stake of 4.9 per cent in Echo and this week Macquarie Group bought a 5 per cent stake.
Shares in the company have been placed in a trading halt, having last changed hands for $4.49.