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Tabcorp – No compensation for you!

In April 2008, the Victorian Premier John Brumby lobbed a grenade at the feet of gaming companies Tabcorp and Tatts Group. The state government’s decision to change the structure of the electronic gaming machine industry not only effectively neutered both companies’ EGM businesses, it denied both companies from substantial compensation to which they believed they were entitled.

It appears that Tabcorp has been unsuccessful with its court action while Tatts Group has apparently received $450 million.

For many years, Tabcorp and Tatts operated EGM businesses in the hotels and clubs in Victoria with the only other competition from the 2,500 gaming machines at the Crown casino in Melbourne. The state limited the total number of gaming machines to 27,500 outside the casino so Tabcorp and Tatts had the lion’s share of that total between themselves which proved quite a lucrative business.

The EGM businesses were operated under a licence issued by the state government which was due to be renewed, or at least the companies thought so, sometime before the August 2012 expiry date of each licence.

No-one anticipated the change of industry structure proposed by the government even though it was somewhat unique. The licences had been efficiently run with the government a primary beneficiary of the taxes and levies generated directly from the gaming machine activity.

Instead, Mr Brumby ejected Tabcorp and Tatts in favour of a structure which allowed the hotels and clubs to bid for individual premise licences according to the number of machines in each venue.

The auction proved to be a complete lemon generating a paltry $981 million, at least a billion short of what the government had hoped.

The gaming companies were understandably disappointed at the loss of the licences but were livid at the offhanded dismissal of the compensation claims to which both companies believed they were legally entitled.

Tatts Group launched a statutory claim in the Supreme Court of Victoria as compensation for the loss of its gaming machine licence. Tatts is claiming approximately $490 million based on a complicated formula relating to the original licence payment of $598 million plus a half-share of the $981 million the Victorian government received from the sale of gaming machine entitlements to the clubs and pubs that bought them in the auction process in 2010.

Tabcorp paid $597.2 million for the grant of its licence back in 1994 when the company assumed responsibility from the Victorian TAB. The agreement allowed for compensation if new licences were issued with a formula that suggested compensation could be up to $686 million. Tabcorp thinks this amount is unlikely to be paid but has pursued the state government through the courts to claim its compensation.

Most analysts have long discounted the chance of any compensation being paid to either company. Indeed, Tabcorp wrote off the remaining $461 million value of its gaming and wagering licence in 2008, more from an accounting perspective although it strongly reiterated its case to pursue the compensation. It’s not clear how much Tabcorp has spent on the litigation but it will have been considerable.

Tatts Group managing director in 2008, Dick McIlwain, was clearly exasperated by the shenanigans of the Labor government of the day. He said: “One of the interesting things about this government, particularly for significant stakeholders, is that it is virtually impossible to get access to the government. It is very difficult to build a business and contribute to the debate about issues. It is almost as though decisions are made unilaterally.”

Tatts subsequently moved its head office from Victoria to Queensland.

Tabcorp’s gaming machine business reported EBITDA in FY08 of $271 million which valued that part of the group at approximately $2.5 billion just prior to the state government licence decision. That represented about 27% of Tabcorp’s enterprise value at the time which included the casino business before it was demerged from the group.

For Tatts, the impact was even greater at the time as gaming machines represented $2.2 billion or 42% of group enterprise value.

Tabcorp’s market capitalisation on 10 April 2008 was $7.5 billion prior to the announcement. By the end of June 2008, its market value had declined to just over $5.1 billion.

Tatts’ market capitalisation suffered even more harshly dropping from $4.6 billion to just under $3 billion over the same time period.

Both companies reported an aggregate of $1.5 billion in write-downs in the 2008 financial year.

The damage was irreparable.

Tatts has gone on to substantially rebuild its business through acquisitions of other state lottery businesses and has made a good fist of that strategy.

Tabcorp demerged its casino business into what is now Echo Entertainment. The core of the Tabcorp business is still operating wagering licences around the country but is a shadow of its former self.

With the benefit of hindsight, the gambling industry has been blighted by a seemingly endless array of regulatory calamities and unforeseen potholes. Smoking bans, levy increases, licence changes, competitive loopholes, equine influenza epidemics and even broadcasting rights bust-ups.

So it’s probably off to the Appeal Court for Tabcorp. Tatts Group might just be throwing a small victory party tonight.

Sometimes, it just comes down to whether the ‘soup nazi’ likes you or not.

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