Tabcorp Banks on Demerger With Long Timeline
At a time when most companies are seeking involvement in mergers and acquisitions, Tabcorp is looking to do the opposite. It is actually considering demerging its lotteries and keno division. The company expressed the idea publicly in a corporate structure review in March and has been toying with the idea ever since. Not everyone is happy with the plan, but it seems to be moving forward anyway.
How Big a Company is Tabcorp?
It is the largest gambling company in Australia related to lotteries and related gaming products. It is a publicly-traded company on the Australian Securities Exchange.
Tabcorp was already a massive company but joined with Tatts Group in 2017 to create a market dominator. With Tabcorp’s history dating back to 1964 – though only to 1994 as a public company – and Tatts Group originating in 1962, the conglomerate comprises a significant portion of overall gambling in Australia. It is now a multi-billion-dollar-per-year company.
To date, Tabcorp claims $5.7B in revenue, $6.7B in net assets, and distribution of $4.9B of benefits to stakeholders.
The brands association with Tabcorp are:
- The Lott lottery online and in retail
- Keno online and in pubs and clubs
- TAB betting online and in retail
- Sky Racing broadcasting
- MAX gaming services platform
Why Fix Something Not Broken?
At the end of March 2021, Tabcorp announced that it had received and considered several unsolicited proposals regarding its wagering and media business. Those valued that aspect of that part of the company at approximately $3B. However, Tabcorp felt that estimate actually undervalued the business. In response, it decided to undergo an official strategic review of the entirety of the company. The goal was to evaluate all ownership options and maximize the structure of its businesses to best benefit shareholders.
Chairman Steven Gregg noted at the time, “The assessment of Tabcorp’s strategic and ownership options includes, but is not limited to, a demerger or sale of one or more of our businesses.”
Not long after, Entain proposed a buyout of the wagering and media arm of Tabcorp for $3.5B, which Tabcorp said it would evaluate. Apollo Management came in a month later with the same bid but upped it to $4B to include the gaming services side of the business. BetMakers also weighed in with a $4B proposal.
All of those bids were overwhelming. Tabcorp made an alternate decision. It would demerge its lotteries and keno business.
What is a Demerger?
Everyone knows that a merger involves two business entities combining assets to create a larger business. It typically signifies the intent to take a bigger market share, enter new markets, and open up many new opportunities.
Sometimes, a company will split itself apart. A demerger is a way for the company to separate some of its businesses. In the case of a company like Tabcorp with numerous business proposals on the table, it could divide the company into unique divisions, each of which could demand higher bids.
For Tabcorp, the focus was on creating two companies by separating lotteries and keno. The two new companies would be:
- Lotteries & KenoCo: lottery to operate in all of Australia except Western Australia; keno to operate in NSW, ACT, Victoria, Queensland, and South Australia
- Wagering & GamingCo: TAB for omni-channel wagering; Sky for multi-channel racing and sports broadcasting; American and European businesses; MAX for gaming services
The two standalone companies would receive more focused management and growth plans. It would also provide the ability for each business to “participate in future M&A activity.”
What Next?
Speaking of mergers and acquisitions, the July 5 notice of the demerger mentioned the previous bids from Entain and Apollo. It asked them to reevaluate their proposals based on the new Tabcorp structure and resubmit if they choose. BetMakers will remain in discussions with Tabcorp regarding potential commercial opportunities.
The process of the demerger would be somewhat complicated. Shareholders would receive shares of each based on their holdings. Tabcorp would submit a Scheme of Arrangement for the courts to approve and engage in conversations with regulatory bodies and governmental organizations to move forward with those approvals. There would also be lots of discussions with the Australian Tax Office, especially with regard to giving shareholders tax relief for Lotteries and KenoCo shares.
The costs would be serious – $225M to $275M in one-time separation costs and then approximately $40M to $45M per year of ongoing costs.
The annual general meeting is set for 19 October 2021 to discuss the demerger further. As the compny puts together its new structure, they will await the first-half financial results in February 2022 for the period ending 31 December 2021.
Pending positive developments to that point, Tabcorp will defend its new scheme in court in April 2022 and hold a special demerger meeting in May. The goal is to complete the demerger by May or June 2022.
Tabcorp Full-Year Results
In mid-August, Tabcorp released its full-year financials for the previous fiscal year.
On a year-on-year basis and at first glance, the 2020/2021 year wasn’t the best. Due to the many impacts of Covid-19 on multiple aspects of the business, Tabcorp didn’t show the results it would have liked. However, the news wasn’t all bad.
Some of the major points included:
- Revenue up 8.8% to $5.686B ($462M increase)
- Operating expenses up 1.3% to $807M ($10M increase)
- EBITDA up 11.3% to $1.107B before significant items ($112M increase)
Splitting the business into three parts for reporting purposes, gaming services suffered the most with a 17.2% year-on-year revenue decrease. However, the lotteries and keno division jumped 9.9% and the wagering and media sector increased 10.3%. Those balanced out the loss for gaming services, which suffered directly with the closing and capacity restrictions on hotels and clubs throughout the pandemic.
As a result of said pandemic and the resulting lockdowns, Tabcorb provided approximately $95M in relief to venues. Tabcorp did receive $8M from the Australian Government’s JobKeeper program for its gaming services division.
Public Reactions to Demerger Plan
Most financial analysts familiar with the Aussie market believe the move to demerge is a positive one for Tabcorp. In order to more neatly work on potential partnerships with Entain and/or Apollo, separating the companies will make the process much easier. Shareholders will benefit as well.
Some shareholders agreed with that long-term analysis, but some sold stock after the July announcement. To garner benefits from the demerger will require possibly a year of waiting for the demerger itself and longer for other M&A results. In addition, the costs associated with the entire process for Tabcorp may cut into profits. Finally, some are skeptical about the timing of it all, as the pandemic lingers. Investing so much into the demerger before M&A talks can even move forward is a risk.
The ASX trend showed that initial selloff of stocks and subsequent volatility.
In June stocks hit a high of 5.3, which was a 52-week high. But the first few days after the official demerger decision, it dropped to 4.74. Since then, it has flirted with the 5.0 mark but continues to fluctuate.
