Tabcorp to Spin Off Casinos, Raise A$430 Million

Elmer Funke Kupper, CEO of Tabcorp Holdings Ltd.
Elmer Funke Kupper, chief executive officer of Tabcorp Holdings Ltd. Photographer: Luis Enrique Ascui/Bloomberg

Tabcorp Holdings Ltd., Australia’s biggest gambling company, plans to spin off its casinos into a separate company from its betting shops as it raises A$430 million ($425 million) in an entitlement offer.

Investors will get a share in each company on a 1-for-1 basis, in a split expected to be completed in July 2011, Melbourne-based Tabcorp said in a statement today. Separate companies will enable the businesses to pursue different growth strategies, Chairman John Story said on a conference call.

Tabcorp proposed the breakup as it seeks to renew a betting-shop monopoly in Victoria state and boost spending on venues to lure high-stakes gamblers. Both businesses may need capital to pay for expansion as the company plans a A$175 million revamp of casinos in Queensland state in addition to the existing A$860 million refurbishment of Star City in Sydney.

“Both of these companies are going to have issues,” said Theo Maas, who helps manage A$5 billion of equities at Arnhem Investment Management in Sydney. “There’s a lot happening in terms of bidding for licenses and regulation.”

Tabcorp, whose shares are halted from trading pending the entitlement offer, closed at A$7.10 on the Australian Securities Exchange on Oct. 15 and has gained 2.2 percent this year. The stock hasn’t posted an annual advance since 2006.

Corporate Credit Rating

Standard & Poor’s placed Tabcorp’s BBB+ corporate credit and debt ratings on “creditwatch” with negative implications.

“The proposed demerger of the casino business will reduce Tabcorp’s cash flow diversification through loss of casino revenues, which, in addition to the loss of most of its Victorian gaming revenues from 2012, will weaken its business risk profile,” the rating company said in a statement today.

Investors will be able to buy one new share at A$6.25 for every nine they hold under the entitlement offer. UBS AG is acting as sole underwriter and manager of the stock sale.

Tabcorp expects the betting and slots business will have an investment-grade credit rating after the split, while no rating is expected for the casinos, according to the statement.

Creating separate companies may boost the share price and enable potential bids for either of the businesses, Maas said.

“People will start looking at the separate assets because they are probably worth more than they are combined,” he said.

Star City

Australians gamble more than A$17 billion a year, or about A$1,123 per capita, according to the Queensland state government’s Office of Economic and Statistical Research.

Tabcorp owns three casinos in Queensland as well as Star City, the only one in Australia’s largest city. It has betting-shop monopolies in two states, with the Victorian permit to expire in 2012, the same year it loses a duopoly with Tatts Group Ltd. for 27,500 slot machines in the state.

Australian casinos are typically local monopolies, with no competing venues in the same city.

Chief Executive Officer Elmer Funke Kupper, who has been in the role since July 2007, will oversee the separation before stepping down and taking a non-executive position on the board of the slot-machine and betting business, which will keep the Tabcorp name.

Larry Mullin, who heads the company’s four casinos, will continue as CEO of the business once it is spun off. He joined the company last year along with two colleagues from the Borgata Hotel Casino & Spa, the most profitable gambling house in Atlantic City.

David Attenborough will run Tabcorp’s betting shops, slot machines and other non-casino assets.

The company also issued a trading update, with revenue in the first quarter ended September rising 4.1 percent. Casino sales increased 7.1 percent while betting-shop revenue climbed 4.1 percent and slot-machine sales gained 0.9 percent.

The cost of protecting Tabcorp Holdings bonds from default surged after the announcement. Credit-default swaps on Tabcorp jumped 13 basis points to 125 basis points as of 10:15 a.m. in Sydney, according to Nomura Holdings Inc. That’s the highest since July 17 last year and the biggest increase since May 7, CMA prices show.

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