Queensland gives Tabcorp a leg-up against competitors

Tabcorp chief executive Adam Rytenskild with Queensland Treasurer Cameron Dick, Racing Minister Grace Grace and Toowoomba Turf Club boss Lizzy King after the announcement of the increase in the point of consumption tax. Picture: Matthew Poon

Monday’s surprise Queensland government decision to reshape how it taxes gaming could not have come at a better time for Tabcorp’s new chief executive Adam Rytenskild.

Cast out two weeks ago as the ugly duckling in the demerger of lotteries and wagering, Rytenskild now has another $30m a year to help him claw back business from the large international online betting firms like Sportsbet, Bet365 and Ladrokes.

Investors had been pushing for the demerger to realise greater value from the lotteries business. Once that happened, the smaller Tabcorp fell over ten per cent in the first week.

Two years of Covid-19 lockdowns and the barrage of international online disrupters left a crisis of faith in the business model. Morgan Stanley’s analyst Morgan Baxter said her concern for a lone Tabcorp was it had a structural cost disadvantage to corporate bookmakers that could not easily be resolved. And that meant less money to spend on growing market share.

In Queensland at least, that structural disadvantage is going.

The change delivers a $30m annual uplift in earnings for the Tabcorp. If Queensland is the first domino to fall and other states follow suit, analysts will be sharpening pencils.

Rytenskild calls it an important and serious reform and it is. “We’ve been working on it for a little while but it was fantastic to come to an agreement so quickly,” he tells The Australian. “One of the things that has held us back has been an un-level playing field.”

Tabcorp’s had been paying the Queensland government additional fixed product fees, a hangover from the historical monopoly that the TAB had in the state. It meant the company was paying roughly double its competition.

The deal has three parts which are interconnected.

First, in recognition of the rise and rise of the internationals, the additional TAB fees will go and Tabcorp’s share of the tax paid now falls from 44 per cent to 35 per cent of Queensland wagering and gaming revenue.

Second, the state government’s point of consumption tax, brought in during 2018 is lifted from 15 to 20 per cent tax and will be applied to all wagering operators: bookies, the TAB and online offshore players.

Third, Tabcorp will agree to pay $150m to Racing Queensland to settle litigation over a 2019 disagreement on how that tax was calculated.

Tabcorp had flagged a one off hit from the litigation of $108m pre-tax at its half year results. This is below the $150m figure but Rytenskild says the higher amount was all part of the overall negotiation with the state government. “This deal is combination of things and settling the litigation is just part of it. Levelling the playing field is the real value for customers and growth and sustainability of the company,” he says.

Also under the new deal, Queensland Racing will be given another $40m per year, accounting for 80 per cent of the tax proceeds.

In all, Queensland has given Tabcorp a recurring uplift, acknowledged in the company’s share price which was up some five per cent on Monday.

In one negotiation Rytenskild has tidied up a loose end and put the business on a more competitive footing going forward. All players in the state will now pay the same wagering taxes and product fees.

Importantly for Tabcorp this opens the door to deals in other states, each one offering another earnings lift.

Behind the scenes, the online gambling giants to which Tabcorp has been losing millions are lobbying furiously against the changes. The Queensland deal comes as a blow to them so do not expect the lobbying elsewhere to slow down. Sportsbet has posted advertisements for government relations people in NSW, Victoria and Western Australia.

“We want to pay the same as everyone else. We are advocating for that in other states as well,” says Rytenskild. “We will look to work with governments to achieve that and to increase funding for the racing industry as part of it. This is a first step.”

In Western Australia the long awaited privatisation of the WA TAB wagering business is back on track having been on hold during the pandemic with a deal expected to be finalised by the end of the year.

Back in October, then racing minister Reece Whitby said that the new TAB owner would not have to continue to fund the WA industry and that the state would take it on.

Mark McGowan noted that the concern of potential buyers (including Tabcorp) being required to fund the racing industry while competing with big international gaming operators. “They’d prefer that it’s sold and a new model by put in place,” he said.

Rytenskild says every state is different: there is a license process in WA and TAB has a licence in Victoria which ends in Aug 2024.

“We will weigh each of those opportunities up commercially for each state. Every government in every state will look at the right model for them that funds racing in a sustainable way and also makes the licensee competitive,” he says.

After the pandemic shut pubs, clubs and stand-alone agencies, foreign-bookies made record profits. Part of the Tabcorp pitch is that these profits are shipped offshore rather than being reinvested in the industry.

The Queensland breakthrough gives Rytenskild a first proof point that Tabcorp has ability to level the playing field.

The Tabcorp Holdings demerger unlocked hundreds of millions of dollars in value for investors and The Lottery Corporation remained a top 50 ASX company.

At Tabcorp, Rykenskild and his team have much work to do – including the bid for the WA TAB. The 22 year veteran of the business needs to focus on a better app and improved products if it is to win market share, grow the company and get back into the top 100.

“It’s not just structural reform and levelling the playing field. It’s important for us to invest in our digital customer experience and our offers and our marketing and that’s definitely part of our strategy,” he says.

“I think the demerger was absolutely the right thing. Wherever that has us in the ASX rankings, I’m more interesting growing the profits, ensuring those are sustainable profits, delivering for customers and the share price will take care of itself over time.”