A year on from when Apollo Global Management and Entain offered between $3.5bn and $4bn for Tabcorp’s Wagering and Media unit, the division’s market value is as much as $1.6bn less than their offers.
But analysts at Macquarie believe that investors should not despair just yet.
In research, the investment bank has looked at the general trend of demergers and says that underperformance of the demerged unit is typical for the first six months before the trend is reversed with strong long-term performance.
Yet they note that the trend has been longer and larger for recent transactions, taking 12 months to out perform.
On the first day of trade on Tuesday, Tabcorp’s market value without its lotteries unit included was $2.4bn or $2.6bn including debt.
The more lucrative lotteries business that was spun out of Tabcorp, known as The Lotteries Corporation, ended its first day of trade with a $10.46bn market value.
It takes at least one year for the parent entity to out perform, Macquarie said.
One demerger that has bucked the trend is the spin-off by Woolworths of its liquor business Endeavour Group in July last year, with it performing strongly in the first 11 months of trading.
Macquarie’s research tested data involving 44 demergers and while the sample set was small, the pattern post demerger was consistent and there were no significant outliers, Macquarie said.
Across all historic deals the child entity can underperform by up to 10 per cent in the six months following a demerger, Macquarie said.
For the parent entity the performance across all of history has been more muted with market performance pre and post transaction.
Macquarie said it was not until around 18 months that it observed outperformance from the parent stock.
In more recent times, there has been a stronger run-up into the demerger event.
One of the reasons that the child entity underperformed was that shareholders needed time to familiarise themselves with the spun-off entity and would err on the side of caution and wait for delivery, Macquarie said.
Another is that the merged business may also be going through a more difficult period, thus motivating a review of business structure, and deciding to demerge.
While Tabcorp’s suitors Entain and Apollo are not thought to be reviving bids for the wagering unit after being rebuffed last year, they may turn up in the near future if the company continues to trade at low levels.
They said that they expected investors to show caution on Tabcorp considering structural challenges and possible capital requirements for wagering licences.
Tabcorp has faced structural challenges within Wagering & Media and Gaming Services through increased competition, contract losses and more recently Covid-19-related retail closures.
“Whilst we see growth in the near term, more so a recovery from Covid disruption, we are hopeful that the businesses can stabilise at around $430m earnings before interest, tax, depreciation and amortisation in the 2023 financial year and long-run growth at about 2 per cent annually.
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