Tabcorp board mulls lotteries demerger as suitors snap at its heels

Gaming giant says it is considering all strategic options, including a demerger of its lotteries business.

Tabcorp CEO David Attenborough made no reference to a chief executive succession plan. Picture: Britta Campion

Tabcorp’s board is considering a demerger of its more lucrative lotteries business as it moves to fend off a potential takeover and appease shareholders who have long called for the split.

The gaming giant is in a state of flux and yet to unveil any chief executive succession plans — more than seven months after David Attenborough announced his impending retirement — as London-listed rival Entain and private equity groups circle the company.

When asked if Tabcorp’s board would demerge its lotteries businesses — a move some of the biggest shareholders on its register have called for — Mr Attenborough said the board was “considering all strategic ­options”.

“The key principle that the board follows is to act in the best interests of our shareholders, and we have said they are assessing all the options and that’s all I can really say,” Mr Attenborough said.

But it has only been after Tabcorp has received multiple “unsolicited offers” to take over and break up the business that its board has begun considering a potential split of its lotteries business, which has continued to be the company’s main revenue driver, contributing more than 62 per cent of the group’s earnings.

In mid 2019, major shareholder Perpetual called for Tabcorp to consider a split, saying the poorer-performing wagering division was weighing down the lotteries business reaching its full potential value. At the time, Mr Attenborough dismissed the call, saying it would be foolish to consider a merger until this year, when the tortured integration of its $11bn merger with Tatts from 2017 was completed.

In the past two weeks, after Tabcorp revealed itself as a takeover target, the calls to split the lotteries business have got louder. 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.

Tanarra Capital, the Melbourne investment house headed by John Wylie and a major Tabcorp shareholder, also supported a break-up, saying a lotteries-­focused Tabcorp could trade at 17-25.5 times EBITDA.

“The board has received various unsolicited proposals and they are taking a careful approach in assessing those, and looking at them strategically, and that is appropriate,” Mr Attenborough said when asked why it had taken so long to consider a demerger.

“I have answered as much as I am prepared to answer on that today.”

Tabcorp’s shares fell 1.1 per cent to $4.41 on Wednesday, compared with a 0.5 per cent dip across the broader sharemarket.

Despite Tabcorp not making any mention of CEO succession plans in its half-year results announcement on Wednesday, Mr Attenborough said the search was well advanced, with an announcement expected in the coming month.

“Not only is it well advanced, I have given a commitment that I’ll stay steering the business until the new CEO starts,” he said.

“I actually spoke to the chairman and he confirmed that his expectations were still in the first quarter.”

Mindful of not commenting on the takeover proposals, Mr Attenborough said he understood why foreign parties, particularly from US casino groups, have been scrambling to protect their empires, with Caesars acquiring UK bookmaker William Hill last year for almost $US4bn. Meanwhile Entain itself has fended off an ­approach from casino group MGM amid the land grab for online betting capability.

“There is a lot of activity in the US, a lot of interest in the US and we continue to monitor that,” he said. “It’s been very good for our Sky Racing World business in the US where we actually export not only Australian racing but New Zealand, Hong Kong and Singapore, African, South Korea and Japanese racing into the entire US, and that’s been growing strongly. The US market provides quite a nice opportunity for us from a B2B [business to business] perspective.

“We have got a business, a ­wagering and media business, that’s just completed its integration. It’s got earnings that have been affected by COVID. It’s very well positioned in this market and I can imagine, and we are seeing, a lot of interest from interested ­parties.”

This week The Australian’s DataRoom revealed that private equity firm Apollo Global Management had reiterated its proposal for all components of the company except its lotteries division sits at somewhere between $3bn and $3.5bn. Apollo, now known to be working with law firm Gilbert + Tobin as well as ­Jefferies, is said to have recently reiterated its bid to the Tabcorp board. Meanwhile, the owner of Tabcorp rival Ladbrokes, London-listed Entain is offering $3bn cash for the Tabcorp wagering and media division, while keeping the door open for a potential alternative partial scrip offer.

The understanding is that the Tabcorp board has aspirations to achieve a price of at least $3.5bn for the wagering and media unit. Meanwhile, analysts have estimated that Tabcorp’s lotteries business could be worth $10bn alone — more than the company’s entire current market capitalisation.

S&P Global Ratings analysts said Tabcorp’s “earnings recovery is gaining traction, underpinned by momentum in its high-quality lotteries cashflows, strong digital growth, disciplined cost control, and management’s progress on [its] integration objective”.

“That said, we believe the Australia-based company’s wagering division remains exposed to a structural shift toward more competitive online channels, which may have accelerated during the pandemic,” S&P analysts said.

Tabcorp’s overall group revenue fell 1.5 per cent to $2.9bn, with net profit tumbling 7 per cent to $185m in the half year to ­December 31.

Earnings before interest and tax fell 5 per cent to $132m across Tabcorp’s wagering and media division, on the back of an 0.8 per cent revenue rise to $1.2bn. Meanwhile, its lotteries revenue rose 1.6 per cent to $1.6bn, with the division’s EBIT rising 4.9 per cent to $258m.

Tabcorp will pay a dividend of 7.5c a share fully franked on March 17, representing a payout ratio of 80 per cent.