crikey's tatt's piece today

Here is what crikey had to say about TTS in today's newsletter to subscribers:


24. Tattersall's and the disaster that lies ahead
An investment banker writes:

Last week Crikey ran a column by Stephen Mayne regarding the so-called "Chairman's List" allocations of 5,000 shares each to a number of prominent Victorians – including man-of-the-moment Steve Vizard. The message here was that each of these already privileged individuals was being granted another $2,000-odd of instant "wealth" by virtue of the stag profit on their investment.

It may be that the bigger issue with the Tattersall's float will unfold over time when the 28,000 ordinary Australians that Tattersall's welcomed on to its register this month realise they have overpaid for their holding by about 1/4, and with the current trading price representing an even greater premium to fair value.

The issue here is that Tattersall's is currently being priced as though its business would operate in its current form pretty much in perpetuity. But this is simply not the case. Tattersall's Victorian gaming licence expires in 2012, with the post-2012 licence situation to be resolved in 2007. As Crikey has consistently pointed out, the huge profits that Tattersall's generates from this business (UBS estimates $204 million of EBITDA in 2006) are a gift from the Kirner government – the legacy of a time when the government just didn't realise how much revenue gaming was capable of generating.

Consequently the gaming revenue pie was cut up in a fashion that saw the non-government stakeholders reap enormous rewards. You can bet your bottom dollar that this won't be the same next time – either the ongoing tax take will be radically higher or the "front money" that a gaming operator will be required to pay for a licence will strip much of the value out of the licence.

This is a point that has not been lost on the broker analysts. I have reviewed recent research on Tattersall's from UBS, Deutsche Bank and CSFB – all first rate brokers and all with valuations on Tattersall's of well below the retail issue price of $2.90 and the current market price of circa $3.25. Indeed, their valuations range from $1.92 (CSFB) to $2.41 (UBS). I have never seen brokers valuing a major float at such a discount to the issue price.

So the question arises – how did the brokers to the issue, Goldman Sachs JB Were and Macquarie Equity Capital Markets, do it? The answer appears to be that they used a technique very similar to those of the dot com days – they kept stock scarce (only about 14% of Tatt's issued shares were sold into the float with the rest being retained by Tattersall's previous owners, the "beneficiaries") and relied on IPO hysteria and a concern that the stock may get 100% weighting in the S&P/ASX 100 Index in December to drive demand for a stock that index-tracking institutions may soon "have" to hold.

But stock scarcity and index membership won't support a share price for ever. It was concern about the 2012 licence issue that inspired Tabcorp to spread its wings beyond Victoria – with Ross Wilson leading the acquisition of Star City back in the late 1990s. Since Matthew Slatter took the reins in late 2002 the pace of non-Victorian diversification has accelerated, with the acquisition of both Jupiters and TAB Limited (NSW totalisator operator). As a consequence, the licence risk in Victoria is now just a small part of the story when analysts turn their attention to Tabcorp.

But for Tattersall's licence risk is simply unavoidable. And won't the small investors of Victoria and Tasmania wail when the market wakes up to that!