Analysts have made known their opinions about two of the big demergers happening in the Australian listed market.
Credit Suisse, Citi and Morgan Stanley analysts discuss the merits and pricing involving the lotteries arm of Tabcorp and the fertiliser division of Incitec Pivot.
Tabcorp’s demerger was approved by the court on Friday and told the market on Tuesday that its scheme of arrangement has now become effective.
The lotteries arm starts trading on Tuesday May 24 on a deferred settlement basis and will be known as The Lottery Corporation.
Credit Suisse analysts said that they valued the lottery division at $10.3bn, net of allocated debt.
This equated to 18 times earnings before interest, tax, depreciation and amortisation on an enterprise value basis.
The valuation is in line with other infrastructure-like assets trading on the Australian securities exchange.
The analysts said that the business should be a cash-generation powerhouse that could return about $1.7bn of capital to shareholders by converting ticket sales to free cash flow over the next three years.
The analysts said that they valued Tabcorp’s wagering division at $2.8bn.
But share price volatility could set in with Tabcorp’s Victoria wagering licence expiring in 2024 and Victoria starting a licence tender process.
It comes as the West Australian government is also planning to sell its TAB business this year.
The sale process is currently into the binding offer phase through Ad Astra Corporate Advisory, with Tabcorp slated as the front runner to buy the $1bn-plus unit.
It also may be impacted by legal proceedings brought by Racing Queensland over its share of payments that could create a $40m hit to its bottom line.
Credit Suisse analysts add that Tabcorp is likely to trade at a significant discount to other listed wagering companies that have US growth options, and they said that for this reason, they were not relevant comparables.
Meanwhile, on Incitec Pivot’s plans to demerge its fertiliser unit, announced on Monday, Morgan Stanley said that the they believed the split seemed opportunistic.
“While fertiliser prices are currently favourable, at long run average prices the manufacturing assets are not attractively positioned on the cost curve.”
Morgan Stanley questioned whether strategic benefits outweigh the $80m to $105m of one-off costs and an additional $25m to $35m of ongoing costs.
“We also note the challenges for Phosphate Hill based on its reliance on the Glencore Mt Isa copper smelter.”
Under the separation scheme, Incitec Pivot will be rebranded as Dyno Nobel, and a new standalone company called Incitec Pivot Fertiliser will be created.
The separation is expected to happen next year, subject to shareholder and regulatory approval.
Citi analysts say that they believed it remained unclear whether splitting Incitec Pivot into Fertilisers and Explosives could generate value over and above guided costs of separation.
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