TAH AGM Address Fails to Inspire Confidence as Shares Falls (ASX:TAH)

Renowned gaming and wagering stock Tabcorp Holdings Ltd [ASX:TAH] is in the red today.

The $11 billion company is trading 2.68% lower at time of writing, sinking on the back of an update from management about its future plans.

A result that has snapped the share price’s more upbeat momentum of late.

Let’s take a closer look at the cause of the reversal…

Demerger plans and details

The highlight for investors is still the recently announced demerger plans of Tabcorp. A proposal that was first announced back on 5 July.

Suffice to say, it was quite a shock to shareholders at the time — putting a lot of pressure on the share price as investors feared for the worst. After all, demergers can be tricky to pull off at the best of times and can often lead to less efficient or effective use of split-up assets.

Tabcorp, though, is plowing ahead with their planned demerger, convinced that it will benefit all involved. Crucially, it will also result in two new ASX-listed businesses: Lotteries & KenoCo and Wagering & GamingCo, of which current shareholders will gain respective shares in each.

As for how it will all unfold, though, Tabcorp has laid out some key details. Confirming that they hope to have the deal done and dusted by June. All of which is set to come at a cost of $225–275 million.

Time and money that will likely impinge on earnings for this financial year and next. Something that has already been noticeably impacted by the pandemic and subsequent lockdowns.

So it is easy to see why investors have bid the stock down today.

But in the long run, this will hopefully be a net gain for investors. At least, management certainly believes it will be:

‘This decision to set up two market-leading businesses, will deliver a range of operational and strategic benefits.

‘Through the Tabcorp-Tatts combination, the foundations were laid for both Lotteries & KenoCo and Wagering & GamingCo to deliver long-term growth.

‘Lotteries & KenoCo is expected to be a significant business in the lottery category.

‘Its infrastructure-like qualities, low capital intensity, and upside from continuing digital growth make it an attractive business.

‘Similarly, Wagering & GamingCo will operate some of Australia’s best-known wagering and gaming brands — TAB, Sky Racing and MAX.

‘It has a strong platform for organic growth supported by its domestic scale and diversified assets and well established and profitable international businesses.

‘Our priorities are on execution of the proposed demerger by June 2022 whilst managing through the phased reopening of retail operations in each state.

‘We are focused on ensuring the proposed standalone businesses have the best platform for continued success upon demerger next year.’

Time will tell if Tabcorp can meet these expectations.

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What’s next for the Tabcorp Share Price?

Besides the planned merger, Tabcorp has plenty of other factors to consider as well.

Regulation, for instance, is one area that was raised in this AGM address. Noting that the company hopes to see reforms and a more levelled playing field in the years to come — directly contrasting its highly-taxed business model to its online competitors that make use of less stringent rules under different licences.

Whether or not we will actually see change to the wagering industry is hard to say. But it is clear that Tabcorp will be pushing to at least make more people aware of the issues.

Furthermore, current CEO David Attenborough had planned to retire earlier this year. That move has now been postponed, though, as both the board and David himself agreed that he was best suited to oversee this demerger.

So while that will keep him in the top job for the rest of FY21, at least it will mean new leaders will be required for the two new businesses in due time. Something that investors will want to pay close attention to.

As for whether Tabcorp is a good or bad investment right now, well it all depends on how you perceive this upcoming split. Because one way or another, it is certainly going to shake things up.

However, it may not be the biggest split to impact the market in the next year…

No, the real demerger that you should be aware about is the one between Australia and China. A trade divorce that could have a multitude of massive and far-reaching consequences. A development that our very own Greg Canavan has been telling his readers about for quite some time now.

So if you want to be prepared for this potentially once-in-a-lifetime headwind, then hear what Greg has to say, right here.

Regards,

Ryan Clarkson-Ledward,
For Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here