The real issue with the Tattersall's float

Last week Crikey ran a column by Stephen Mayne regarding the so-called
"Chairman's List" allocations of 5,000 shares each to a number of prominent
Victorians - including the man-of-the-moment, Steve Vizard. The message here
was that each of these already privileged individuals was being granted another
$2,000-odd of instant "wealth" by virtue of the stag profit on their investment.

It may be that the bigger issue with the Tattersall's float will unfold
over time when the 28,000 ordinary Australians that Tattersall's welcomed onto
its register this month realise that they have overpaid for their holding by
about 1/4, and with the current trading price representing an even greater
premium to fair value.

The issue here is that Tattersall's is currently being priced as though its
business would operate in its current form pretty much in perpetuity. But this
is simply not the case. Tattersall's Victorian gaming licence expires in 2012,
with the post-2012 licence situation to be resolved in 2007. As Crikey has
consistently pointed out, the huge profits that Tattersall's generates from this
business (UBS estimates $204 million of EBITDA in 2006) are a gift from the
Kirner government - the legacy of a time when the government just didn't realise
how much revenue gaming was capable of generating. Consequently the gaming revenue
pie was cut up in a fashion that saw the non-government stakeholders reap
enormous rewards. You can bet your bottom dollar that this won't be the same
next time - either the ongoing tax take will be radically higher or the "front
money" that a gaming operator will be required to pay for a licence will strip
much of the value out of the licence.

This is a point that has not been lost on the broker analysts. I have reviewed
research on Tattersall's from UBS, Deutsche Bank and CSFB - all first rate
brokers and all with valuations on Tattersall's of well below the retail issue
price of $2.90 and the current market price of circa $3.25. Indeed, their
valuations range from $1.92 (CSFB) to $2.41 (UBS). I have never seen brokers
valuing a major float at such a discount to the issue price.

So the question arises - how did the brokers to the issue, Goldman Sachs JB Were
and Macquarie Equity Capital Markets, do it? The answer appears to be that they
used a technique very similar to those of the dot com days - they kept stock
scarce (only about 14% of Tatt's issued shares were sold into the float with
the rest being retained by Tattersall's previous owners - the "beneficiaries")
and relied on IPO hysteria and a concern that the stock may get 100% weighting
in the S&P/ASX 100 Index in December to drive demand for a stock that
index-tracking insitutions may soon "have" to hold.

But stock scarcity and index membership won't support a share price for ever.
It was concern about the 2012 licence issue that inspired TABCORP to spread its
wings beyond Victoria - with Ross Wilson leading the acquisition of Star City
back in the late 1990s. Since Matthew Slatter took the reins in late 2002 the
pace of non-Victorian diversification has accelerated, with the acquisition of
both Jupiters and TAB Limited (NSW totalisator operator). As a consequence, the
licence risk in Victoria is now just a small part of the story when analysts
turn their attention to TABCORP.

But for Tattersall's licence risk is simply unavoidable. And won't the small
investors of Victoria and Tasmania wail when the market wakes up to that!

Peter Fray

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Peter Fray
Editor-in-chief of Crikey