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 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 on to its register this month realise 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 recent 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 institutions 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