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Tatts to repay $540 million windfall after Victorian government wins High Court appeal

Tatts Group will be forced to hand back $540 million (plus interest and costs) to the Victorian government after the High Court ruled in favour of the appeal. The decision brings an end to the four-year saga as the ruling found Tatts was not entitled to the payment. Consequently, fellow gaming group Tabcorp lost its appeal for $687 million in compensation.

The case:

  • Tabcorp and Tatts were handed 18-year licenses by the Kennett Coalition governement in 1994;
  • In 2008 the Labor Brumby government imposed that 27,500 pokies were to be the responsibility of venue operators, as opposed to Tatts and Tabcorp;
  • Legislation was issued which stated that the government was not liable for compensation to the groups;
  • The matter was taken to court and Tatts were successful in there argument while Tabcorp was not;
  • The Victorian Government appealed the case to the High Court and subsequently the original decision was voided.

 

At Tatts’ half year results 2016 (before the decision had been overruled), the proceedings from the case were recorded as a current liability labelled unearned income. We expect Tatts to advise the market as to whether this amount will be paid out of cash or funded via additional debt. This will most likely increase the net debt to EBITDA ratio but consolidated liabilities should remain unchanged.

 

As for Tabcorp, all legal costs relating to their case have been recognised in previous periods and will not effect full year earnings for 2016.

 

From an operational point of view, Tatts’ approach to the structural change within the gaming industry has paid off as growth in the lotteries business was derived from new products and increased online penetration. However, Wagering continues to perform poorly which is surprising given the Ubet re-brand and increased investment. This could suggest that competitive pressures are affecting the group as more private betting agencies flood the digital market.

 

As a result of the high court decision, a potential merger between the two gaming groups is back on the radar. The combined group would create a $9 billion gaming and lotteries giant and given the recent slump in share price it is likely that investors are quietly pushing for renewed talks. This speculation suggests Tatts could possibly merge with Tabcorp and spin of the wagering segment altogether which leaves some uncertainty surrounding the group’s future.