Sell yourself to larger rival, major investor urges Tabcorp

John Wylie's Tanarra Capital says the wagering giant should also consider walking away from a bid for the West Australian TAB licence if competition is too great.

Tabcorp currently has exclusive retail licences in Victoria, Queensland and NSW and is in the race to pick up a similar arrangement in Western Australia. Picture: Mark Evans/Getty Images

One of Tabcorp’s largest shareholders has urged the company to abandon a bid for the West Australian TAB licence at its mooted $1bn price tag and consider merger with an international suitor such as the London-listed Entain.

Tanarra Capital, the asset management firm run by veteran investment banker John Wylie, believes Tabcorp needs to show fiscal discipline while concentrating on rolling out better digital betting services to its customers, and risks paying too much for the WA retail betting licence should it join in a bidding war.

Vidhur Rangaswamy, a portfolio manager at the firm, told The Australian that Tabcorp should not adopt a “have it any cost” mentality for the WA licence and be prepared to walk away if rivals such as Entain and a consortium led by bookmaker Matthew Tripp push the price up to a level that stretches Tabcorp’s balance sheet.

“We do want Tabcorp to show discipline in this instance. Putting a high value for that (retail betting) is not where the market and the world is at the moment, and doubling down on that business at that sort of big value is not preferable,” Mr Rangaswamy said.

“If a competitor goes on to burden themselves with a legacy asset, a structured licence, then you will have an operator who would be weighed down by that legacy and you can attack that market digitally.”

Tanarra holds about a stake of about 3 per cent in Tabcorp and long argued for it to demerge its lucrative lotteries business, which it did earlier this year when The Lottery Corporation became a separately company. Mr Rangaswamy said Tabcorp should now consider a merger with Entain, the operator of Ladbrokes and other bookmaking brands, which had a $3.5bn bid for its wagering and media arm rejected last year.

“The wagering industry in this country, at some point consolidation makes sense, and we think a merger with Tabcorp and Entain makes terrific logic,” he said.

“From a Tabcorp perspective you could get scrip in Entain … and you’d get an operator that has shown it can win share digitally, and has got the balance sheet and broader business to provide ballast while Tabcorp undergoes the turnaround it needs, and you’d also get exposure to the US market (via Entain).

“It feels like a complete win for a Tabcorp shareholder, even if the headline value would not be as much as last year.”

Tabcorp currently has market capitalisation of about $2.3bn and has exclusive retail licences in markets such as Victoria, NSW and Queensland, where they have betting outlets and their TAB outlets in pubs and clubs.

But Covid-19 lockdowns since March 2020 have accelerated the trend towards digital betting, a strength of Tabcorp’s corporate bookmaker rivals such as Sportsbet, Bet365 and Entain, which owns the Ladbrokes and Neds brands in Australia.

That has cost Tabcorp overall market share, and the company’s chief executive Adam Rytenskild told an investor day in June that Tabcorp would be disciplined when it came to bidding for any state retail betting licences that are currently up for grabs and wanted to focus more on improving its app and digital offerings.

Tabcorp chief executive Adam Rytenskild. Picture: John Feder

“Any licence be it Victoria or WA, if we are going to spend money to enter into a new structure it needs to make us more competitive, and we’ve been clear here today that we want to be more digitally competitive. So it needs to achieve that, he said. “There are terms that we think it is worth acquiring a licence for.“

Bids for the WA TAB, which is said to achieve about $100m in earnings annually, were due by August 1, but the process is to be delayed until later that month.

The process for the Victorian retail licence, which Tabcorp holds until 2024, is also underway with the state government outlining a scenario where up to three operators could emerge as holders of the next licence.

“To me non-exclusive licences are difficult, I’m not sure they really work for us,” Mr Rytenskild said on the investor day.

“Even if there is no licence in Victoria (for Tabcorp), we will be a much higher margin business, a more competitive business than we are today.

“That’s the state that we have the lowest margin in. Beyond August 2024, that’s going to be more positive for Tabcorp.”

The Australian last month reported that Tabcorp had secretly proposed a three-decade extension to its Victorian agreement with a “positive obligation” from the government to “have the licence remain competitive”.

The proposal was submitted to the Justice Department on July 23 – two months after expressions of interest were due.

On Thursday, UBS analysts reinstated their coverage of Tabcorp with a $1 price target. Shares last traded at $1.01.

“Now operating as a stand-alone entity, Tabcorp has the opportunity to refocus and change the historical underperformance within wagering,” wrote analysts Suthesh Jeyakandan, Shaun Cousins and Sam Merrick.

“While management appears to have an attitude towards change, the structural challenges facing Tabcorp’s business have not changed, which means much of the ‘success’ will be based on ability to execute on the strategy.

“Structural reform of key licences continues to be the most significant driver of value; however, such changes are not guaranteed and timing is difficult to predict,” they wrote.

In June, Queensland hiked point of consumption taxes to 20 per cent and made other changes which reduced fees and taxes on Tabcorp, benefiting it by some $30m annually. NSW has also changed its tax rules and handed Tabcorp a $30m payment.