Tabcorp’s casino expansion plans are not much exiting the market. One source said “deep dark money pit”! The press announcement brought a downgrade of the company’s rating and outlook. The Tabcorp plans to capture the Australasian VIP market, one that Crown Limited largely dominates.
Ratings agency Standard & Poors (S&P;) reduced the Australian-facing company’s A$1.99m debt outlook from “stable” to “negative” over concerns on the further A$285m investment in its Star City casino in Sydney announced as part of full year results last week. This came with the warning that Tabcorp’s capital expenditure plans could further risk its new rating as the company faces the possible loss of its Victorian wagering licence later this year.
Gambling industry analyst Andrew Hills (Wilson HTM) said
“The capital expenditure required to operate a competitive casino is oppressive and we question whether Tabcorp is throwing good money after bad. The New South Wales and Queensland casinos are attractive for the respective state governments but not for shareholders, in our view.”
Nathan Gee (Merrill Lynch) advised Tabcorp will either have to protect their new credit rating by an equity raising, or bite the bullet and incur higher debt costs from a further ratings downgrade, which he suggests may be the better option. Last week, Tabcorp chief Elmer Funke Kupper advised the aim of Star City was to create a destination for VIP’s and said the investment was a “no-brainer addition” to the company’s plans.
In the full-year results, the Australian casino and gaming operator reported a 9.4% drop in its casino division’s EBITDA, however predicted that it would see an estimated A$130m-140m EBITDA uplift from its Star City investment by 2014. A concern for Tabcorp will be the expiration of its Victorian wagering licence, due to end in 2012. Aussie rival Tatts Group and the UK’s Ladbrokes, no stranger to Media Man and Gambling911, have indicated their intentions to compete with Tabcorp for the next 12-year licence which will grant the winner a virtual monopoly on wagering and sports betting in that state of Victoria.
Earlier this week the Victorian Government tabled legislation that would give valuable premium wagering tax concessions to the licence holder, but while analysts believe the license to be worth A$4bn, they also reckon renewing it could cost Tabcorp anywhere between A$300m and A$600m! “Tabcorp winning the Victorian wagering licence might put pressure on its S&P; credit rating depending on the eventual price paid” said an insider. “Interestingly Tabcorp missing out on the Victoria wagering licence would ease the pressure around a credit rating downgrade or an equity raising,” but over-paying for the licence may be better in the long haul than missing out full stop.
Tabcorp has a war on its hands for the bid, as Australia’s Productivity Commission specifically recommended at the start of the year that it was against the renewal of wagering monopolies in New South Wales and Victoria. Tabcorp’s main investment program, the Star City Casino, is expected to now cost A$860m in addition to a A$100m payment to the New South Wales government for the pleasure, but Funke Kupper last week argued that the high price of investments would pay off by pulling in the big spending VIPs. That’s his vision, but not that of the whole markets. The company reported that Star City’s 10% year-on-year EBITDA growth was offset by a 29% drop year-on-year in the company’s 3 “banana bender” Queensland casinos. Tabcorp is in negotiations with the government over increasing investment in its Queensland properties, where sliding trade is being caused by weak economic conditions in the region. A no-brainer? Readers, you be the judge.