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Why did the Tabcorp share price sink 80% last week?
The Tabcorp Holdings Limited (ASX: TAH) share price tumbled 80% on Tuesday after it completed the demerger of its Lotteries and Keno (L&K) division into a separately listed ASX company. The division has been renamed The Lottery Corporation and will trade under the ticker code “TLC”. The existing Tabcorp listing will house the group’s wagering and gaming activities.
Shareholders will receive one share in TLC for every one share owned in Tabcorp. For example, if a shareholder owns 500 Tabcorp shares, it will retain these shares in addition to being issued 500 TLC shares. Don’t fret if the shares haven’t been deposited yet. Transfer of TLC shares to eligible shareholders will occur on Wednesday, May 1. Normal trading is to commence on Thursday, May 2.
The demerger has already been shareholder accretive. At the time of writing, Tabcorp’s share price had settled at $1.04 with TLC opening at $4.64 in early trade. Adding the two together gives a combined share price of $5.68, above the final closing price of $5.39.
The main rationale to demerge the two divisions was to highlight the inherent value of L&K, which had been underappreciated in the broader Tabcorp structure. TLC is a high-quality business model, with an effective monopoly over lottery sales in all states other than Western Australia. The business has grown sales and earnings steadily over the past decade, therefore attracting investors looking for reliable profits and subsequent dividends. Given its infrastructure-like earnings profile, it will also attract the interest of Australian and overseas pension funds.
Tabcorp’s wagering and gaming assets face a more competitive landscape, which has been disrupted by digital natives such as Sportsbet. The business recorded EBITDA of $169 million in the latest half and would be considered a high-risk turnaround play. Existing investors now get to choose which parts of the business they wish to own. Meanwhile, new investors can now get direct exposure to each division rather than owning a combined entity.
TLC will attract marginal buyers such as dividend investors. Furthermore, institutional investors who previously were unable to own Tabcorp due to ESG mandates will be able to get in on the action. Conversely, Tabcorp will likely come under selling pressure over the coming months as investors ditch the lower quality business in favour of the higher quality one. However, it falls too far don’t be surprised if private equity sweeps it up. Last year the wagering and gaming division received two $4 billion offers which were subsequently knocked back. At the time of writing, Tabcorp has a market cap of just $2.3 billion.
The author owns shares in Tabcorp and The Lottery Corporation.
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