Company Overview: Tabcorp Holdings Limited is engaged in the provision of gambling and entertainment services. The Company operates through three segments: Wagering and Media, Keno and Gaming Services. It manages customer brands, including TAB, tab.com.au, Luxbet, Sky Racing, Sky Sports Radio, Tabcorp Gaming Solutions (TGS), Keno and Trackside animated racing game. It conducts wagering activities under the TAB brand in Victoria, New South Wales and the Australian Capital Territory through a network of agencies, hotels and clubs; provides on-course totalisators at thoroughbred, harness and greyhound metropolitan and country race meetings; and via the Internet, mobile devices, phone and pay television. Its Gaming services segment is engaged in the supply of electronic gaming machines and specialized services to licensed gaming venues. Its Keno segment includes Keno operations in licensed venues and TABs in Victoria, Queensland and Australian Capital Territory, and in licensed venues in New South Wales. 


TAH Details

Tabcorp Holdings Limited (ASX: TAH), the gambling and entertainment player, had reported for a mixed FY17 result with NPAT of A$178.9m, down 3.8% over prior corresponding period (but within guidance of $173m - $180m), and revenue of A$2,229.6m, which was up 1.9%. The group’s gaming services revenue was up 34.2% while weakness in wagering segment prevailed with increased costs. The group had acquired Intecq, a complementary gaming systems and monitoring business, and also launched its UK start-up, Sun Bets. TAH is also progressing with its digital expansion strategies while retail partnerships are being strengthened through digital commissions model and launch of Keno digital play. The group’s focus on merger with Tatts is also continuing as per its plan.


FY17 Results (Source: Company Reports)
 
Postponement of meeting of Tatts shareholders:Tabcorp recently reported that the Supreme Court of Victoria has postponed the meeting date of Tatts shareholders by about 6 weeks. This Scheme Meeting is for Tatts shareholders regarding the merger of the Tatts along with the group. The meeting is now scheduled for 30 November 2017 instead of their earlier proposed meeting on 18 October 2017. It was noted that the Australian Competition Tribunal (Tribunal) had given the authorization for the deal. On the other hand, The Australian Competition and Consumer Commission (ACCC) and CrownBet Pty applied for judicial review of the Tribunal's authorization to the Federal Court of Australia. But, the group got all the necessary pre-implementation approvals of the relevant State and Territory gambling regulatory authorities related to the merger.
 
Merger with Tatts to generate synergies and business improvements:The group estimates that the Transaction would generate at least $130m per annum (p.a.) of EBITDA from synergies and business improvements. They expect over $80 million p.a. of EBITDA operational expenditure synergies, from wagering functions consolidation (which would deliver at least $19 million p.a. of EBITDA), technology integration and systems optimization (which would contribute at least $24 million p.a. of EBITDA) as well as from the corporate cost rationalizations (including property and field services savings) (which would contribute at least $37 million p.a. of EBITDA). They also forecast over $10 million p.a. of capital expenditure synergies. The merger would deliver a better wagering business given the optimization of the performance of the group’s fixed odds wagering business coupled with the turnover growth across the UBET business driven by several initiatives. Moreover, the group forecasts the merger would also lead to a better Keno business in Tatts' South Australian Keno business. The group forecasts the synergies and business improvements to reflect in the first full year post finishing the integration of the businesses which might take over two years to finish from the date of implementation, subject to the receipt of the necessary regulatory approvals. The incremental one-off costs and capital expenditure related with integration to achieve synergies and business improvements is forecasted to be over $119 million (post-tax).
 
Rising competition in Australia coupled with structural changes in the industry: Australian wagering industry has faced major changes in the last decade hurting the competitive positions of Tatts as well as Tabcorp. The Australian wagering industry continues to face major structural changes in product as well as channels. Some of the changes relate to removing historical advertising restrictions which had prohibited wagering operators from advertising in jurisdictions in which they were not licensed. Moreover, favorable fiscal and regulatory environment in the Northern Territory led to a major growth of corporate bookmakers. But these corporate bookmakers did not have the same regulatory requirements and racing industry funding requirements like Tatts or Tabcorp, as they are giant firms. Accordingly, corporate bookmakers leveraged the opportunity they had and enhanced their turnover in recent times. Rising online wagering (primarily via mobile betting apps) coupled with the favourable fiscal and regulatory environment in the Northern Territory, has also expanded online wagering services and digital offerings in Australia. As a result, the proportion of total wagering turnover transacted in retail outlets decreased. Moreover, the growth of online wagering made them to expand their penetration to over half of the total Australian wagering industry turnover. On the other side, for the last five years, the fixed odds racing and sports wagering has shown a major growth while this trend would continue going forward. Rising popularity of sports betting has led several independent Australian corporate bookmakers to be acquired by major international wagering companies as part of an aggressive targeting of the Australian market by global wagering companies.


Combined group license portfolio (Source: Company reports)
 
Complementing business performance via merger: In FY17, Tatts group generated over 63% of their EBITDA on a standalone basis from their lotteries segment while their wagering business, comprised over 22% of their EBITDA during the same period given the highly competitive market. On the other side, the group generated over 69% of its EBITDA from their wagering and media business, with contributions of over 16% from their gaming services businesses in FY17 while the rest of the EBIDTA was contributed from its Keno business. As per both the group’s FY17 performance, they estimate the combined group EBITDA wagering and media business would deliver over 46% of the combined group's EBITDA, while the lotteries business would contribute over 31% of the combined group's EBITDA. Tatts Shareholders who would acquire shares in the combined group would be able to leverage the benefit of any synergies and business improvements realised through integrating both the firms wagering businesses while also retain exposure to Tatts’ lotteries business. The shareholders would get a better exposure to the highly competitive wagering markets in Australia as well as the UK (through the Sun Bets business). However, the shareholders also need to note that there could be risks involved if the combined Group does not adequately respond to the competition especially in the wagering market, where there could be a change in consumer spending patterns leading to a heavy impact on the operational and financial performance of the Combined Group.


Tatts FY17 performance (Source: Company reports)
 
Building a diversified portfolio via Merger: The group is targeting a diversified portfolio via the merger which comprises wagering, racing media, lotteries, Keno and gaming services operations Under the Wagering and racing media segment, the group would have a totalizator and fixed odds licensed businesses and retail wagering networks in all Australian states and territories in Australia other than Western Australia. They would provide wagering products in over 4,300 retail outlets, on-course at race tracks, online, and through call centers and a national Sky Racing media business. Their Lotteries segment would have an Australian lotteries business with licenses and authorizations to offer products in all Australian states and territories in Australia other than Western Australia in over 3,800 retail outlets.  Keno distribution network would have over 4,000 venues in New South Wales, Victoria, Queensland, South Australia and the Australian Capital Territory. The group’s Gaming Services would comprise gaming machine monitoring operations in New South Wales, Queensland and the Northern Territory and venue services nationwide. The combination of the two complementary businesses is forecasted to support investment and innovation, comprising the ongoing development of digital products. Having long-dated licenses with a diversified portfolio, the combination group would be well positioned to invest, innovate and compete in a rapidly evolving marketplace as a strong Australian racing industry is likely to deliver a broader and more engaged customer base for wagering products, which would enhance the support for the activities of the combined group and might create further value for combined group shareholders.


Targeting a Diversified portfolio (Source: Company reports)
 
Stock performance:The shares of Tabcorp lost over 11.3% in the last six months (as of October 06, 2017). The group proposed scheme for $4.25 to $4.67 per Tatts share comprises $0.47 per Tatts share of value related to the potential synergies and business improvements (assuming these benefits are realised in full, of which there is no guarantee) and net of one-off integration costs. This is a premium offer for Tatts which is currently trading at over $3.97 (as of October 06, 2017 price). We believe that the shares of TAH would recover based on the strategies adopted and any positive movement on the proposed merger. Trading at a solid dividend yield, we give a “Buy” recommendation on the stock at the current price of $4.270.
 

TAH Daily Chart (Source: Thomson Reuters)

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