The post-demerger challenges facing Tabcorp

The post-demerger challenges facing Tabcorp

It’s less than a week since the freshly spun-off Tabcorp released its first standalone results, and the company’s market cap is now about $2.23 billion.

The results didn’t dazzle: shares fell a bit more than 5 per cent. It might be early days, but for some, proceeding with the demerger rather than considering a takeover offer is already a serious mistake.

But for those prepared to give the group the benefit of the doubt, it’s at least setting some reasonable targets.

Tabcorp chief executive Adam Rytenskild – who joined the group in 2000 and has run the wagering division since 2017 – likes to talk about this new company blowing off its cardigan, and being more aggressive and driven. It will need to do at least that if it is serious about delivering on its new targets.

One key area that supporters are hoping he will push into – and detractors doubt can happen with legacy systems and management – is digital customers, an area that has been dominated by corporate bookmakers.

Like many others, Tabcorp has been heavily criticised for missing the shift to digital, and most notably, its failure to convert traditional retail customers to digital during the lockdowns.

The latest numbers show the group isn’t losing digital share any more.

But it’s got quite a long way to go to reclaim its dominant position and match the range of products offered by its competitors.

Digital gambling app

For example, Tabcorp launched its same-race multi-product this month, which allows punters to bet on more than one horse in one race, a product offered by its competitors for some months, if not years. It’s yet to launch more social products such as ones that allow a group of friends to pool their funds to bet.

But despite that, the company, which launched a new digital gambling app in September with advertisements airing during the FIFA World Cup broadcast, slightly increased the number of users in the past 12 months. It now has about 25 per cent of the market.

Tabcorp says it has about 797,000 active digital TAB customers on a rolling 12-month basis to December 31, 2022, up from about 780,000 in the previous corresponding period.

Another metric watched closely is the so-called “generosities” – incentives paid to betters for using the products, and used across the industry. Tabcorp disclosed that it spent about $200 million this year or 4.2 per cent of its $4.9 billion digital turnover.

That’s in effect the difference between the gross digital yield and net yield. And it’s a cost that is expected to increase if Tabcorp is serious about capturing more market share.

Clearly, Tabcorp has ambitions to do better in expanding its digital share, but it wants to do this while reining in costs.

UBS analysts have cautioned against this and they are not factoring in all these gains in their 2025 forecasts for Tabcorp. And although Tabcorp has started to reverse the historical losses in its digital share, the broker expects a competitive response to its products and promotions.

Tabcorp told investors it was targeting a 30 per cent digital market share in the next 2½ years, as it reduced operating expenditure to between $600 million and $620 million, which implies a 2 to 3 per cent per annum net reduction in the next two years.

News Corp has shown its second-quarter call how expensive building market share can be. The company said it had a $US29 million loss on its 47 per cent stake in online bookmaker Betr which implies an almost $90 million loss for the latter. During the period, the group ran some big promotions, including offering 100-1 odds for bets up to $10 on any horses racing in the Melbourne Cup.

Another big uncertainty for the group is Victoria’s TAB licence renewal, due to expire in August 2024.

Those who believe in Tabcorp’s strategy say it’s an important opportunity to reset the licence terms and level the playing field with corporate bookmakers, as it has in other states.

Complicated process

But it looks to be shaping up as a more complicated process than that, and one that Tabcorp – which is criticised by some in the racing industry for its failure to invest enough in its products – might have to pay up to retain. At this stage, the structure of the licence is unclear, which makes estimating its value challenging. Numbers in the market range from $500 million to $1.5 billion.

Tabcorp was first granted the Victorian TAB licence in 1994, and says it has spent the past 20 years investing in retail customer acquisition, and therefore owns the customer list. Competitors say that without access to the details of a customer list, they cannot assess the value of a rival bid for the TAB licence.

The government has signalled that the structure of the new licence will change. It’s currently a 50-50 joint venture between Tabcorp and the Victorian racing industry, which is carved up between three codes.

It’s that structure that allows some to complain the venture isn’t as profitable as it could have been had Tabcorp not ceded so much ground to corporate bookmakers.

It also refocuses the market on the eroding interest in totaliser betting – where people placing bets do not get to know the odds before the race or game – in favour of fixed odds. Totaliser pools were traditionally a highly profitable segment for Tabcorp.

Amid all the noise, it’s worth noting that Tabcorp chief executive Adam Rytenskild is betting on his own success.

He’s been acquiring shares, most recently after the latest results, when he bought another 250,000 shares at worth on February 22.

He now owns 3 million shares.

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