Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Amid the frayed nerves over the detention of 18 Crown Resorts employees in China, you could be forgiven for thinking that Australians spend most of their gambling dollars in casinos.

In fact, close to two-thirds is fed into slot machines, a ubiquitous presence in pubs as well as sports and veterans' clubs in most states of the country. Just 3.4 percent of gambling losses in 2010 were from VIP gamers, the high-rolling international casino players allegedly targeted by Crown's staff in China .

Losing Big
Table games in casinos make up barely more than one-10th of Australia's gambling spending
Source: Productivity Commission
Note: Data are for 2010. Slot machines total includes casino slot machines.

Two other gambling categories that make up more than one-quarter of the market will be squeezed together in a deal announced Wednesday. The racecourse-betting giant Tabcorp will pay A$6.4 billion ($4.9 billion) for Tatts, the country's biggest operator of lotteries, creating Australia's largest gaming company by revenue.

Looking at its share price, Tatts's attractions might at first appear hard to understand. Shares in Star Entertainment, the casino operator that Tabcorp spun off in 2011, have dramatically outperformed Tatts over the past three years. The likelihood of surging revenues from international gamblers gives Star much more attractive growth prospects than can be expected from the stolid lottery revenues at Tatts.

Strong Hand
Tabcorp's spun-off casino business, Star Entertainment, has outperformed over the past three years
Source: Bloomberg
Note: Figures have been rebased. Oct. 21, 2013=100.

Stolidity is far from a dirty word in business, though, and Tabcorp's takeover offer is best understood as a retreat from the more competitive corners of the gambling market into a stable, monopolistic redoubt.

Tabcorp makes 86 percent of its revenue from wagering -- odds-based bets on sporting events such as horse races and football matches. Tatts, by contrast, gets 72 percent from its lotteries.

Bricks and Clicks
Online's market share in lotteries is forecast to remain low even as it swallows the wagering industry
Source: H2 Gambling Capital via Australian Wagering Council, Gadfly calculations

Wagering in Australia is under serious pressure from online players such as Europe's William Hill and Paddy Power Betfair, but lotteries tend to be heavily regulated government monopolies that are harder for competitors to crack. Online gaming businesses will make up 38 percent of the global wagering market by 2020, according to H2 Gambling Capital, a consultancy. In lotteries, they'll take just 5.5 percent.

That helps explain the attractions of Tatts. Looked at in terms of profitability, it's not a particularly impressive catch next to Australia's other gambling businesses -- returns on equity are just 7.9 percent, less than half what Crown or Aristocrat, a slot machine manufacturer, can boast.

Clipping the Ticket
Tatts's return on equity is poor for a gambling company, but it's pretty good for a utilities business
Source: Bloomberg

But stack it up next to gas and electricity distributors, another group of businesses with long-term government monopolies and unvarying consumer revenue bases, and it starts looking rather more impressive. 

Casino Cage
Tatts' weighted average cost of capital is lower than all its gambling peers
Source: Bloomberg

In terms of weighted average cost of capital, a good proxy for investors' expectations of the long-term stability of a company's cash flows, Tatts is better placed than any of its Australian casino rivals.

Far from taking a gamble with this deal, Tabcorp is buying a utility.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The industry has changed considerably since 2010, but the Productivity Commission's figures are the most recent comprehensive breakdown.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net