Two different futures face Tabcorp and Boral

Tabcorp has unveiled plans for a demerger of its of the lotteries and keno business.

What next for Boral and Tabcorp?

It’s been clear for some time that Tabcorp was embarked on a separation future: the only question had been whether it would be done by a demerger or the sale of the wagering side of the business.

The Tabcorp board gave us the answer on Monday: it’s the demerger and specifically the demerger of the lotteries and keno business, essentially undoing the 2017 merger of the old Tabcorp and Tatts.

This is by far the simpler way to do it – as against both the sale of wagering to a third party like the two competing bidders, Entain and Apollo, or a demerger of the wagering business out of the existing structure, given the mass of complex approvals required for wagering across Australia.

The key point is that it is now all-but impossible for the potential bidders to compete with the internal demerger option.

Seven Group has secured more than a 31 per cent stake in Boral.

They can’t put a ‘blockbuster price’ on the table, and that merges with the difficulty of wading through the regulatory morass without the active co-operation of the Tabcorp board.

Of course, they are entirely welcome to re-start the whole process once the continuing wagering Tabcorp has separated off the lotteries and keno – sometime in the second half of next year.

Does the demerger prove the original merger was a mistake?

I’d argue not. It did bring into Tabcorp the utility-like earnings of the lotteries business.

It also brought in TAB Queensland, giving Tabcorp a national monopoly of the ‘old’ TABs, just when it needed it to meet the digital challenge of the online bookies.

That ongoing national Tabcorp is a much stronger business to meet the even greater challenges of the post (we-hope)-Covid and the ever more digital 2020s.

Thus it’s also a much better – and therefore higher-priced - business to sell, if that becomes the future.

Similarly, the separated lotteries and keno business will be a much better – and therefore higher-priced –business to sell, if that proves to be its future.

Indeed, given its utility-like revenue and earnings profile, it would be a very attractive target for a group of super funds aiming to copy the $22bn proposal unveiled Monday for Sydney Airport.

It’s the number one thing now and its’s only going to become even more the number one thing into the 2020s: finding enough good assets to invest the trillions of dollars of loose investment cash looking for a home in an era of zero or near zero interest rates.

There will be many more Sydney Airports - groups of super funds seeking to move from minority stakes in listed entities to grossed-up stakes in anything remotely like a utility.

As for Boral, as I wrote last week, it’s all over bar the counting - and some ‘shouting’ between board and Seven.

Seven has attacked Boral for continuing its share buybacks into the new financial year.

Quite why July 1 is of any significant difference to June 30 is beyond me; but I suspect Seven isn’t really that fussed.

Yes, Seven would like to get the Boral shares directly, to more clearly and quickly cement its control. But for every share Boral buys back, effectively one-third of it ‘ends up’ in the hands of Seven as Boral’s capital shrinks and the Seven percentage holding rises.

It’s the entirely rational thing for Boral to keep doing. It’s got $3.6bn of excess cash. It’s buying back shares at well under the independently assessed value of $8.25 to $9.13 per Boral share.

Seven is going to end up at pretty much the same destination, with a controlling stake of 35 per cent-plus in Boral (as of Friday it was 31 per cent) and control of maybe just a little bit less than $3.6bn of excess capital and cash.