Details of Entain’s bid for Tabcorp set to be revealed

Tabcorp is ready to engage with Entain, with key details set to emerge as early as Friday.

Investors have been agitating for change at Tabcorp. AFP PHOTO / PETER PARKS

Key details of British bookmaker Entain’s $3bn bid for Tabcorp’s wagering division could be revealed as early as Friday, setting the scene for a bidding war for the embattled business.

After more than a week of consideration, the Tabcorp board is expected to tell the market about Entain’s plans on Friday or next week, which would likely see it offer Tabcorp shareholders a special payment for the wagering arm and leave them with the strongly performing lotteries division as the key asset.

Tabcorp’s board is understood to be becoming more receptive to striking a deal, depending on the terms of Entain’s offer, with its shareholders agitating for the unlocking of value in the lotteries arm that many believe would be valued at about $10bn free of sitting alongside the wagering division that also includes the Sky Racing channel.

If Tabcorp chairman Steven Gregg and his directors do not immediately recommend a deal to its shareholders, Entain could return with a more lucrative bid or other potential suitors could emerge.

Entain, owner of Ladbrokes and Neds, believes its superior technology and global scale will create a wagering juggernaut in Australia, with a merged entity comprising more than a third of the Australian wagering market.

While major shareholders are receptive to the proposal they have made clear that Tabcorp is not a “for sale” business, and Entain’s bid faces competition with private equity companies such as Apollo and Blackstone and possibly US casino groups and even rival Flutter, owner of Sportsbet, also expressing interest.

The Australian understands Mr Gregg, who succeeded Paula Dwyer as chairman last month, is adopting a pragmatic approach to striking a potential deal with any of the company’s suitors, and is known for his commercial acumen.

Ms Dwyer was also known as a deal-maker, having negotiated a $4bn takeover with Canadian private equity giant Brookfield of another company she chaired — hospital group Healthscope — which settled in June 2019, as well as overseeing Tabcorp’s $11bn merger with Tatts in 2017.

But investors have been agitating for change at Tabcorp, believing many of the benefits from the Tatts merger have failed to materialise. Although the lotteries business has been a big winner — accounting for 56 per cent of the group’s revenue last year — it has been held back by the poor performing wagering division, which has been losing market share to upstart digital rivals.

Tabcorp shareholder Anton Tagliaferro, the investment director of Investors Mutual, which controls about 3 per cent of Tabcorp’s shares, told The Australian that Tabcorp had “underachieved for a long time, given the monopoly assets that they own” and supported a demerger of the lotteries business to unlock more value for shareholders.

“Clearly the lotteries side of the business has done well since the merger with Tatts. But I think it’s fair to say that the wagering division has been disappointing. It has been disappointing in terms that there have been delays in the integration of the systems and the synergies have been a lot slower to come through,” Mr Tagliaferro said.

“For shareholders, including ourselves, there have been two major issues that we have been pushing for a while. No.1 is the lotteries division is very undervalued within Tabcorp and that’s because the wagering division has been performing so poorly.

“We have been advocating for a spin-off of the lotteries division for some time because if you look at lotteries companies overseas, they trade at significant valuations. No.2 is ourselves as well as many of the shareholders have not been happy with the stewardship of the company in terms of the synergies and benefits of the merger coming through. There have been delays and excuses and it has been very disappointing.”

But Mr Tagliaferro was quick to praise Mr Gregg.

“Having Steven Gregg as chairman is a breath of fresh air, and that’s needed. Investors Mutual is very confident that Steven will do a good job at progressing many of these issues.

“Tabcorp is not a forced seller. The company is still generating very good cashflow, obviously thanks to the capital raising last year which has significantly strengthened the balance sheet. The decision the board and Steven have to make is ‘is it worth more if we hang on to it and improve the performance’ or ‘are we best getting a very good price today’. That’s what I’m sure they are weighing up.

“If the company is offered a good price for the wagering division and it becomes a pure-play lotteries division, that would be a good outcome for shareholders.”

Tanarra Capital, the Melbourne investment house headed by John Wylie and a major Tabcorp shareholder, also supported a break-up. Tanarra portfolio manager Vidhur Rangaswamy said this week a lotteries-focused Tabcorp could trade at 17 to 25.5 times EBITDA.

“A separation of lotteries and wagering liberates each business to pursue its own growth strategy and best deliver shareholder value over the long term,” Mr Rangaswamy said.

Tabcorp shares closed 1.5 per cent lower at $4.50 on Thursday compared with a 0.9 per cent slide across the broader sharemarket.