(Recasts and updates throughout, adds analyst quotes)
By Byron Kaye
SYDNEY, Feb 10 (Reuters) - Two Crown Resorts Ltd CWN.AX directors with links to major shareholder James Packer resigned on Wednesday, the first heads to roll after the Australian casino operator was deemed unfit to hold a gambling licence for its new Sydney casino.
The upheaval in the wake of a report commissioned by the state gambling watchdog raised speculation among analysts that the A$6.6 billion ($5.1 billion) company was in play as a takeover target.
The report, published on Tuesday, cited Crown's links to organised crime and the "dysfunctional" influence of Packer as it declared the company unsuitable to hold a gaming licence for the casino in its newly opened A$2.2 billion Sydney waterfront resort tower. former judge who headed the inquiry, Patricia Bergin, recommended a 10% shareholding limit for all casino operators in New South Wales state, a condition that would require founder Packer to sell down his 36% stake.
Packer's private company CPH said the departures of the executives, and the shift by a third director to independent status, would give Crown "clear air to work with (gaming regulator) ILGA in the execution of its announced reform agenda, and become a model casino operator".
The CPH statement did not address Packer's shareholding or plans.
Crown's shares sank nearly 9% in early trading, compared with a slightly higher broader market .AXJO , but clawed back some losses as speculation grew about the company's takeover target prospects. The shares were down around 3.5% in early afternoon trading.
"The transaction creates an opportunity for trade buyers or private equity to secure a meaningful stake from a forced seller," Citi analysts said in a note. They added that increased regulatory scrutiny would mean "constrained revenue and elevated costs" for the company.
Crown has said it planned to work with the NSW Independent Liquor & Gaming Authority (ILGA) after the report indicated that a sweeping overhaul of its board and business could see its licence reinstated.
The company has not commented on the future of any other directors, including Chief Executive Ken Barton, who was heavily criticised in the report.
Crown was granted a gambling licence for the Sydney tower several years ago, but the ILGA suspended it last year pending the results of the year-long inquiry.
As well as rife money laundering, the inquiry heard about a management structure where Packer requested frequent trading updates despite holding no board or management position, while attempting to take the company private - without disclosing the arrangement to other shareholders.
LENGTHY REFORM PROCESS
ILGA chair Philip Crawford said he planned to correspond directly with Crown chair Helen Coonan on a reform process he expected to take months.
"For any regulator and any government, they're pretty scary terms," Crawford told reporters about the report's finding the company had been infiltrated by organised crime. "They've got a lot of work to do to satisfy us."
Crawford cited a newspaper headline which said Crown needed to "blow itself up to save itself" and added: "that's probably pretty close to the mark."
($1 = 1.2928 Australian dollars)