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 came 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-owned online rivals like PaddyPower's Sportsbet 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. Tabcorp says there are compelling reasons why the deal should get through the Australian Competition and Consumer Commission (ACCC). It is obvious from the company's half-year results how much the competitive landscape has shifted in the last decade as offshore online competitors move in for a slice of the action.
Regulatory hurdles aside, the main threat to Tabcorp's biggest deal since it spun-off the casino businesses in 2011, forming Echo Entertainment, now known as The Star Entertainment, 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 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. Attenborough says he has not been approached by the rival consortium about buying Tatts' wagering business and says there is no point speculating on how a new proposal could be structured. "We are focused on our knitting and are not going to speculate," he says.
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, a British online betting joint venture with News Corp, which it launched in August. SunBet recorded a loss in the half and is not expected to turn a profit in the second 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. It also demonstrates why it is important for Tabcorp not to lose the Tatts bid to the rival Pacific Consortium.
Digital turnover rose 13.8 per cent to $2.19 billion in the first half while bets placed in retail outlets fell 2.5 per cent to $3.3 billion, reflecting the ongoing shift to online. 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. The result was not well received by the market despite beating some analysts' forecasts with Tabcorp shares down more than 5 per cent in afternoon trade.
Attenborough's challenge is keeping 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
