Despite bad news, firm's Kupper runneth over, by Matthew Stevens - The Australian - 8th August 2008
Not many get rewarded for delivering unexpected bad news in this dangerously flighty market, but Elmer Funke Kupper seems to be one exception that helps make the rule.
Yesterday's positive and chunky 6.6 per cent re-rating of Tabcorp in the face of a collection of comparatively vast and, in part, unexpected provisioning reflects well on operational and marketing strengths of its fledgling chief executive.
While the rest of the market struggled yesterday, Tabcorp was written up by 6 per cent after announcing a post-provisions loss of $164 million.
Tabcorp had efficiently flagged its generally steady annual result and that it would be blighted by non-cash provisioning in the wake of the Victorian Government's decision to change the structure of its gaming licensing from 2012.
So, the $487.7 million charge against the future loss of licences was no surprise. Neither was confirmation that a further $110 million or so of the licence valuation would be amortised over the next four years. The same cannot be said of the $194 million write-down of goodwill acquired in the highball, $2.25 billion acquisition of NSW totalisator, TAB Limited, back in 2004.
Funke Kupper yesterday all but admitted Tabcorp paid too much for TAB and that it did so on the back of overly aggressive financial modelling. The time had come, he said, to account for the continuing gap between expectation and reality.
That observation, to a degree, defines Funke Kupper's seriously rugged first 13 months at the helm of Australia's biggest gambling company.
Funke Kupper, you may recall, was called off Tabcorp's executive bench after its board turned on banker turned gambling man, Matthew Slatter, in April last year.
Slatter had been terminated by then chairman Michael Robinson after an unacceptable explosion in Tabcorp's costs of business and a failure to deliver on the promise of the high-ball but strategically necessary TAB acquisition.
The man with the coolest name in business was installed immediately as a caretaker CEO and formally confirmed in the job three months later.
Back then Funke Kupper said he wanted to rebuild Tabcorp's operational integrity while dealing with a daunting collection of legacy and structural issues.
The quality of the 2007-08 result suggests that, despite some serious setbacks -- the biggest being the Victorian licensing decision -- Funke Kupper is hitting enough of his core performance targets.
And the surprising dimension of the write-downs says the Tabcorp board is prepared to pay the price to deliver some clear financial air to the new bloke.
Mind you, there are some real and present operational challenges ahead for Tabcorp.
Its new-horizon business, casinos, has again underperformed, particularly in Queensland. Funke Kupper plans to spend $475 million on revitalising Sydney's Star Casino in a bet he can produce an equivalent step-change in earnings.
To help fund casino expansion, Funke Kupper has foreshadowed a change in Tabcorp's approach to dividend reinvestment.
Tabcorp will likely suspend any further share buybacks for maybe three years as it delivers the new Star. Given that about 20 per cent of the total dividend is usually paid through the DRP, that means Tabcorp's issued capital will expand until at least 2010.
But rest easy, Tabcorp shareholders: Funke Kupper has all but committed to maintaining his payout at circa 94c a share in 2009 and probably beyond.
In the end, about half of the funding for the casino rebuild will come from the DRP.
Over in the core wagering business, Tabcorp's growth has been constrained by a combination of issues past and future. While the company is working hard to rebuild its reputation with the racing clubs, it has also embraced the challenge of changing times, technologies and customer preference. And Tabcorp has to wait another 12 months before there is any certainty over the renewal of its exclusive tote licence in Victoria.
While wagering in Victoria delivers only 8.5 per cent of group EBIT, it is Tabcorp's heritage business and it needs to keep it that way.
Then there is the gaming business, which for Tabcorp has been turned on its head by Victoria's decision to move to a venue-based model for licensing after 2012.
The impact of Victoria's reform cannot be underestimated. The state's gaming sector generates 24.5 per cent of Tabcorp's EBIT and things are going to change big-time after 2012. Funke Kupper says there are three paths Tabcorp could follow to mitigate the damage, two operational and one legal.
The operational choices are to leverage the company's gaming expertise into a venue-based model or to generate income by providing backroom services directly to the venues. The current preference would seem to be the second path.
The legal path is more certain. Tabcorp will pursue the Victorian Government for compensation of at least $686.8 million for the loss of the licences.
The company maintains that the legislation that delivered the licences contained firm mechanics for compensation should government policy change. The Government says Tabcorp is wrong.
The obvious problem for Funke Kupper is that the people who will take his gaming business away are the same ones who will make the final decision on Victoria's wagering business. Clearly the expectation is that the legal dispute will not impact on government thinking. Tabcorp shareholders better hope he is right.
The race for the Victorian wagering licence is more layered than simply winning the bid-off against Tatts Group & Ors for the 12-15 year extension on offer.
As Funke Kupper made clear yesterday, he is not even sure yet that the Victorians will offer to maintain the exclusive licence that currently underpins Tabcorp's Victorian wagering business.
A loss of exclusivity would, obviously, fundamentally change the price anyone would want to pay for a licence.
At the same time, Tabcorp has other beefs with the regulatory environment in wagering.
Fukne Kupper has two main major issues with the way racing betting is moving.
First, he reckons that the ability of bookmakers to offer tote odds delivers them a free ride on his proprietary technology and is an infringement of the exclusivity of his licences.
And second, he believes that bookmakers and a suite of new internet players have been delivered race fields and yet do not make the same financial investment in the racing that is required of the licensed totes.
Tabcorp pays 1.5 per cent of wagering turnover back to the racing industry. Last year it contributed $300 million to Victorian Racing and $214 million to the equine influenza affected NSW industry.
It is frustration with this situation that has, in part, driven Tabcorp into the unregulated area that is the Northern Territory's less regulated bookmaking space.
Tabcorp reckons that overall wagering volumes in the NT will increase by nearly 70 per cent to $5 billion by the end of calendar 2008. Not only does Fukne Kupper want a slice of that action but he wants to "prove to the world that bookmakers should and can contribute to the racing industry based on turnover.
"Totes around the country contribute 90 per cent of all industry funding. They will be the source of funding into the future."
Media Man Australia Profiles
Gaming
Casino News Media
