Sun International, which owns SA’s Sun City resort, says it will pay R536m to increase its stake in Sibaya Casino in KwaZulu-Natal — a deal that came as a surprise to some in the market.

Sun International said on Monday it would raise its stake in Sibaya from 64.8% to 87.2%. The deal will simplify Sibaya’s shareholder structure and is an opportunity to raise its stake at an attractive valuation, the group said.

“Furthermore, the transaction will reduce the cash leakage through reducing minority dividends, will be cash accretive and will over time assist to further deleveraging Sun International’s debt.” 

While the deal seems to be well priced and opportunistic, it came as a bit of surprise given Sun International’s high SA debt levels, said Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management.

Nevertheless, Sibaya has been one of the group’s better performing casinos in recent years, Van Vlaanderen said.

“We remain concerned over the impact of the reopening of the recently refurbished Suncoast Casino, as well as the opening of several electronic bingo sites in Durban that could impact on Sibaya’s revenues,” he added. Suncoast is owned by Tsogo Sun.

Sun International’s shares closed 0.9% lower at R47.30 on Monday.

The group said it will subscribe for shares in Sibaya and repurchase shares in the casino held by Dolcoast Investments.

As part of the deal it will also acquire Dolcoast’s 29.9% stake in Afrisun KZN Manco and 3.7% equity interest in National Casino Resort Manco for R3.9m.

The transactions will be funded with cash resources and external debt.

The book net asset value of Sibaya was R341m at the end of 2018. In the year to end-December 2018, Sibaya generated revenue of R1.3bn and profit after tax of R234m.

In March, Sun International said it had reduced the value of its flagship asset, Sun City, by R306m after it had slipped into an operating loss in 2018.

Sun City’s income fell 3% to R1.7bn in the year to end-December, while that asset made an adjusted operating loss of R8m, from a profit of R26m in 2017.

The resort is Sun International’s third-largest by income, after GrandWest and Monticello.