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Tabcorp-Tatts deal reflects that gambling can be as certain as death and taxes

Amid the frayed nerves over the detention of 18 Crown Resorts employees in China, international observers could be forgiven for thinking that Australians spend most of their gambling dollars in casinos.

In fact, close to two-thirds of the nation’s gambling money is fed into poker machines, with their ubiquitous presence in hotels as well as sports and RSL clubs. Just 3.4 per cent of gambling losses in 2010 were from VIP gamers, the high-rolling international casino players allegedly targeted by James Packer and his Crown staff in China.

The pair will create a $11.3 billion gaming giant after Tabcorp agreed to pay a 20 per cent premium for Tatts shares.
The pair will create a $11.3 billion gaming giant after Tabcorp agreed to pay a 20 per cent premium for Tatts shares. Photo: Getty Images

Two other gambling categories that make up more than one-quarter of the market will be squeezed together in the mega merger deal announced on Wednesday. Racecourse-betting giant Tabcorp will pay 6.4 billion for Tatts, the country’s biggest lottery operator, creating Australia’s largest gaming company by revenue.

Looking at its share price, Tatts’s attractions might at first appear hard to understand. Shares in Star Entertainment, the casino operator that Tabcorp spun off in 2011, have dramatically outperformed Tatts over the past three years. The likelihood of surging revenues from international gamblers gives Star much more attractive growth prospects than can be expected from the stolid lottery revenues at Tatts.

Stolidity is far from a dirty word in business, though, and Tabcorp’s takeover offer is best understood as a retreat from the more competitive corners of the gambling market into a stable, monopolistic redoubt.

Tabcorp makes 86 per cent of its revenue from wagering — odds-based bets on sporting events such as horse races and football matches. Tatts, by contrast, gets 72 per cent from its lotteries.

Wagering in Australia is under serious pressure from online players such as Europe’s William Hill and Paddy Power Betfair, but lotteries tend to be heavily regulated government monopolies that are harder for competitors to crack. Online gaming businesses will make up 38 per cent of the global wagering market by 2020, according to H2 Gambling Capital, a consultancy. In lotteries, they’ll take just 5.5 per cent.

Far from taking a gamble with this deal, Tabcorp is buying a utility.
Far from taking a gamble with this deal, Tabcorp is buying a utility. Photo: Patrick Cummings

That helps explain the attractions of Tatts. Looked at in terms of profitability, it’s not a particularly impressive catch next to Australia’s other gambling businesses – returns on equity are just 7.9 per cent, less than half what Crown or pokies maker Aristocrat can boast.

But stack it up next to gas and electricity distributors, another group of businesses with long-term government monopolies and unvarying consumer revenue bases, and it starts looking rather more impressive.

In terms of weighted average cost of capital, a good proxy for investors’ expectations of the long-term stability of a company’s cash flows, Tatts is better placed than any of its Australian casino rivals.

Far from taking a gamble with this deal, Tabcorp is buying a utility.

Bloomberg

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