Tabcorp Holdings onto a winner

Price at review – $2.86 (ASX:TAH)

The old adage you can run but you can’t hide, might be wagering group Tabcorp’s message to the Victorian Government. When Tabcorp floated back in 1994 under the previous Kennett Government, it agreed to pay $597 million for its wagering and gaming licence for a period extending out 18 years. The group raised at its listing, $675 million, with the bulk of the funds earmarked for the government. The government sponsored prospectus issued to the public, noted that the licences did not need to be amortised over the life of the 18 year period, thus allowing Tabcorp to report higher profits and thus be promoted as a high dividend paying business.

However for this to occur, the accountants signing off on the prospectus needed to be satisfied on how this licence payment should be treated in the company accounts. It was decided that the licence would be sold to Tabcorp on the basis that the company would be entitled to a refund at the end of the licence period – that being August 2012. That refund was to be paid irrespective of whether it successfully re-tendered for the licence or chose not to.

Time has a way of blurring the truth however a passage from the original Tabcorp prospectus in 1994 helps to explain the case that on expiry of the initial licence the company was entitled;

“whether or not it is the successful tenderer to receive an amount equal to the lesser of the sum paid for the new licences and a benchmark, which would be not greater than 115 per cent or less than 85 per cent of the sum paid for the initial licences.”

Based on this refund formula Tabcorp now calculates that it is entitled to $686.8 million in compensation from the government. What gave rise to this claim was the former government’s move in April 2008 to announce that it would not be renewing the gaming licences when they expired but would instead allow the state’s pubs and clubs to own and operate their gaming machines. As such it formed the view that neither Tattersall’s (also a gaming licence holder) nor Tabcorp were entitled to compensation.

And why do you think the John Brumby government took this view? Simple, by working on a technicality that no “new licences” were issued. In one stroke of the pen, the government which had recognised a liability to make payment for these licences in its budget papers between 1994 and 2008 took leave of its responsibilities.

The government will now have to defend itself in court, having auctioned the gaming machine entitlements in 2010 for $981 million to the state’s clubs and pub owners. Tabcorp has in our opinion a very strong hand and in the fullness of time the government may rue the manner in which it avoided its responsibility to act in good faith to both shareholders and the people of Victoria who will be left with the clean up bill should the court’s rule in Tabcorp’s favour. Our original comment on this topic appeared in our June 2008 quarterly newsletter – titled “Governments – Perfecting the art of stealing” available on our website under the heading newsletters.

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