Will Tabcorp’s shareholders be asked to cough up for WA?

The battle for the West Australian TAB is pitting Tabcorp against Entain, which runs the Ladbrokes and Neds businesses in Australia. Picture: Stuart McCormick

All is not well at the new, slimmed down Tabcorp – which has seen its share price slide since it demerged its lotteries and Keno business into the Lottery Corporation late last month.

Since arriving on the ASX with a new price of $1.06, shares have drifted to close at 90c on Wednesday, giving Tabcorp a market capitalisation of $2bn.

Shareholders would be somewhat displeased to note that there was a takeover bid for this business only in April last year at $3.5bn. In July, Tabcorp said it was not interested in the approach from London-based sports betting outfit Entain and Apollo Global Management.

As DataRoom reported late last month, equities analysts at Macquarie say shareholders should not necessarily despair – it takes between six and 12 months for demerged groups to escape a trend of underperformance.

Macquarie’s research tested data involving 44 demergers and, while the sample set was small, the pattern was consistent and there were no significant outliers, the analyst said.

Now the battle for the West Australian TAB is pitting Tabcorp against Entain, which runs the Ladbrokes and Neds businesses in Australia.

And there’s plenty of speculation that some large investors, already unhappy at the poor outcome of the decision not to sell to Entain and rather demerge the company, are smarting at the prospect of forking out more money should Tabcorp be successful in the WA auction process under way now.

In a note to clients on Tuesday, MST Marquee senior analyst Rohan Sundram put the probability of success for Tabcorp in the auction at 50 per cent.

Mr Sundram estimates the business is worth $1bn, and would have a significant impact on Tabcorp’s gearing should it be the winner of the race.

He estimates there may need to be $500m raised “concurrent to the acquisition” to reduce gearing, although he does describe the deal, if successful, as “transformational” for the company.

Late last month, WA officials said the two parties would be taking part in a 12-week process to submit their binding offers and any terms and conditions that they might put forward.

“There’ll be an evaluation phase after that, and then we’d expect to finalise the transaction if those binding offers are attractive late in the year,” said the state’s Treasury official, Michael Court.

Meanwhile, data released on Wednesday by financial markets data firm Refinitiv found the demerger was the seventh-largest M&A deal globally in May, behind Broadcom’s $US61bn ($85bn) takeover offer for VMware, Prologis’s pending takeover of Duke Realty Corp and Philip Morris’s controversial takeover attempt of tobacco products maker Swedish Match.