![Tabcorp CEO David Attenborough. If successful with the Tatts merger, he will run the biggest gaming group in the country.](/content/dam/images/g/q/l/7/o/c/image.related.afrArticleLead.620x350.gu3lu8.png/1485995892747.jpg)
The sharp drop in Tabcorp's half-year earnings are a reflection of the heavy investment chief executive David Attenborough is making to make sure the wagering giant stays relevant in the digital age.
Technology, regulation and new online competition have been the biggest threats for Attenborough for more than five years as he has reshaped the business with a strategy that meant he could not afford to be conservative when it come to capital investment and acquisitions.
The main prize remains the $11.3 billion merger with Tatts Group. If successful, Attenborough will run the biggest gaming group in the country and have the ability to compete with the growing number of overseas online rivals like PaddyPower and William Hill.
Attenborough told analysts on Thursday he expected that deal to be completed by mid-2017 and said talks with the competition watchdog were ongoing.
"We are working closely through all the questions that flow out of such a process. And we still expect the transaction to complete mid-2017," Attenborough said without giving much away. The potential privatisation of the TAB in Western Australia before a March state election is another issue which could have an impact on the competitive landscape.
Regulatory hurdles aside, the main threat to Tabcorp's biggest deal since it spun-off the casino businesses in 2011 is a potential rival offer from a consortium of infrastructure investors known as the Pacific Consortium.
The consortium, which includes private equity firm KKR, Morgan Stanley's infrastructure arm and First State Super, are expected to wait and see what Tatts' results are like in on February 20 before it makes its next move. It could up its bid for Tatts, try and find a buyer for the lotteries business or walk away altogether.
Digital push
Tabcorp's first-half result was complicated by a series of one-off items, which meant statutory net profit fell 28.1 per cent to $58.9 million. Almost half of the $43.8 million in one-off items is taken up by the legal costs fighting non-compliance allegations by the Australian Transaction reports and Analysis Centre (Austrac) .
It has also spent $17.9 million on SunBet, an UK online bettering joint venture with News Corp, which it launched in August. SunBet recorded a loss in the half. The remaining $9.1 million relates to costs for the Tatts bid and another $4.1 million for the acquisition of gaming technology group INTECQ.
A breakdown in the company's first-half earnings are a window on how rapidly the business mix is changing.
Digital turnover rose 13.8 per cent to $2.19 billion in the first-half while retail fell 2.5 per cent to $3.3 billion, reflecting the ongoing shift to digital. in the racing business, fixed odds rose 21.2 per cent to $311.3 million compared to a 6.9 per cent drop in totaliser to $594.2 million.
The underlying businesses are performing well although some analysts noted earnings in the wagering division were softer than they expected. Attenborough's challenge is he has to keep investors on board while investing in the technology and growth businesses such as SunBet, which will take a while to iron out.
michael.smith@fairfaxmedia.com.au