Casino operators Crown Resorts Limited and The Star Entertainment Group Limited (ASX:SGR) planned initial merger talks in recent months with an eye to combine their Sydney operations. However, the timing of the discussions were cut short in February when the NSW gaming regulator blindsided the industry by launching a new inquiry into the troubled Star. It is understood Star's then under-pressure board was open to operating under a joint venture structure in Sydney that would combine Crown's Barangaroo -casino and Star's Pyrmont operation under a single licence, with both sides owning the proportional value of the merged business based on the assets they would tip into the venture.

This would result in one operator of the two Sydney casinos, with earnings to be split between both owners. However, the Blackstone-controlled Crown was pushing for a full takeover that would have delivered it the Sydney, Gold Coast and new $3.6 billion Queens Wharf casino in Brisbane. The nature of the talks were exploratory and there was no suggestion that any takeover would be a certainty.

Blackstone has denied that any talks took place or that it was aware of any discussions. Star, which now has a new board and chief executive, has declined to comment. There is no suggestion talks have been rescheduled since February or are ongoing.

Multiple sources have told The Weekend Australian exploratory talks were planned to take place in Melbourne on February 19, and logistics for the meeting had been organised. Since then there have been questions over Star's future in NSW, amid clashes last year with the state's gaming regulator. And Star's shares have been on a wild ride since February, first with the sudden exit of chief Robbie Cooke and then another board shake-up.

The Sydney-based casino operator has a market capitalisation of about $1.4 billion. This is well below the value of the property and other assets sitting on its balance sheet. Former Lendlease and Crown CEO Steve McCann was late last month named Star's new chief executive.

Significantly, the planned talks between Star and Crown were called off just days before the NSW Independent Casino Commission announced it was launching another full-scale inquiry into whether Star was fit to hold a casino licence, appointing Adam Bell SC to oversee the review. That announcement from the NICC resulted in Star's shares sliding as much as 20% during a single session. There was no suggestion that either Star or Crown or any of their bankers were aware that another NSW inquiry into Star was coming.

Star's top executives were only told of the inquiry 30 minutes before it was announced. It was those hearings into Star in April that prompted a wave of management and board upheaval. Wall Street asset management giant Blackstone acquired Crown and its Sydney, Melbourne and Perth casinos in mid-2022 for $8.9 billion, representing one of its single biggest investments in Asia.

Crown was previously controlled by billionaire James Packer, who agreed to a deal after a round of negotiations. At the time of the acquisition, Mr. McCann was chief executive of Crown overseeing that casino's overhaul following its own tangle with authorities and anti-money-laundering regulator. Mr. McCann stepped down from Crown when Blackstone took control.

Before joining Crown, Mr. McCann had been the long-serving chief of Lendlease, the developer that built Crown's $2bn Sydney tower. Star's banker, Barrenjoey, was not scheduled to be present at the February talks. On the other side, Crown's Australian boss, Ciaran Carruthers, was believed to have been planning to attend.

Through a spokeswoman, Mr. Curruthers has denied that talks were planned, noting he was on leave at the time involving in a family function. Star's then CEO, Mr. Cooke, and at least one board member, understood to be then chairman David Foster, had been planning to meet the Crown executive and adviser, the former PwC executive Luke Sayers, as well as a Blackstone representative. Through a spokeswoman, Blackstone has said it was not involved in the talks or planning for talks.

Mr. Cooke could not be reached. Mr. Foster did not return multiple calls. Adding to uncertainty in February, both casinos each had their NSW licences suspended until they could prove they were suitable operators.

Crown has since won back its NSW licence. The NICC appointed Mr. Bell to conduct a second investigation into Star to gauge whether the -casino was suitable to be granted its licence back. Mr. Bell's initial probe in 2022 said widespread structural change was needed after Star's management was found to have been lax on controls and had sidestepped money-laundering rules.

This prompted a wholesale management shake-up, including the appointment of Mr. Cooke and Mr. Foster later that year. While the approach has since gone cold, any talk of a merger would put the companies at odds with NSW's Minns government, which is understood to be firmly opposed to the combination of the two casinos under the once licence given the potential for job losses in -Sydney. A combination would put in doubt hundreds of millions of dollars in future hotel or redevelopment investments in the city.

Any tie-up would also trigger competition concerns around suppliers, venue and hospitality services in particular.