Cape Town - A second potential bid for gaming group Gold Reef Resorts (GRR) folded on Friday with potential bidder and rival casino operator, Tsogo Sun Holdings, opting out of takeover discussions.

In a terse notice to shareholders GRR confirmed discussions had been terminated with Tsogo. The notice said GRR had been in extensive discussions with Tsogo - contrasting an earlier advisory to shareholders that the talks were preliminary in nature.

Shares in GRR - which owns the Gold Reef City casino as well as the Golden Horse (Pietermaritzburg), the Mykonos casino (Langebaan) and the Garden Route casino - lost almost 15% on Friday to finish at 2050c. Around 2m shares changed hands in some frantic trading.

Tsogo stepped in as a potential bidder for GRR in mid-March after an initial takeover deal by an Ethos-led consortium was allowed to lapse when gaming board approval for the deal was not forthcoming.

While Ethos was willing to pay 3 400c/share (roughly R11bn) in late 2007 to buyout GRR, market talk suggested that Tsogo - which has HCI as a major shareholders - would be pitching a deal at around 2 800c/share.

The million dollar question now is whether there is any chance of a third bid for GRR in the foreseeable future?

Fundamentally the GRR shares look to represent good value - especially if casinos, like some punters contend, are a solid investment even in tough economic times.

A recent article in Finweek highlighted a number of comments made by directors at the release of the year to end December results.

Possible suitor

These includes a contention that "with gearing at an acceptable level, GRR is positioned to withstand an economic downturn and is hedged against potential increases in interest rates."

Finweek also highlighted that fact that two new properties could position GRR for growth - namely the new Silverstar and Queens Casinos.

GRR recorded adjusted headline earnings of 150c/share in its last financial year, which means the company is trading on the JSE at an earnings multiple of less than 14 times.

If lady luck (in the trading context) has deserted GRR then perhaps the share could drift to below the 2 000c level, which might represent good value for a suitor keen on latching onto longer term growth opportunities in the local casino sector.

One possible suitor - as cited a few weeks ago by Finweek - could be tote operator Phumelela Gaming and Leisure.

While Phumelela is mostly involved in horse racing betting, the group has branched out into sports betting and limited payout gaming machines.

But whether "available" casino operations are a more attractive growth opportunity for Phumelela than growing its profitable offshore tote empire is something to be considered.

- Fin24.com