Tabcorp Holdings: Will the proposal be entertained?

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
27 April 2021, 3:30 PM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Tabcorp (ASX:TAH) has received a revised proposal for its Wagering & Media business from Entain plc, which values the segment at an EV of A$3.5bn (vs. cA$3bn before).
  • The Board will assess the revised proposal in the context of its previously announced strategic review. The revised proposal implies an FY22/23F EV/EBITDA multiple of 8.0x/7.8x, which we view as reasonable.
  • We expect TAH’s strategic review and the Entain proposal will provide ongoing valuation support for the company and focus the market’s attention on the potential standalone value of its high quality Lotteries & Keno business.

Receives revised proposal from Entain for Wagering & Media

TAH has received a revised, unsolicited, non-binding and indicative proposal for its Wagering & Media business from Entain plc (ENT-LSE), one of the world’s largest sportsbetting and gaming groups (online and retail) and owner of a range of established brands (inc. Ladbrokes).

The revised proposal values the group’s Wagering & Media business at an enterprise value of A$3.5bn (vs. approx. A$3bn previously) and remains subject to numerous conditions, as well as the receipt of various third party approvals and consents.

Board still to form a view

The TAH Board has not yet formed a view on the revised proposal and will assess the offer in the context of its previously announced strategic review.

TAH reiterated that the objective of its strategic review is to maximise shareholder value, with options including the potential sale of Wagering & Media or a potential demerger of either Wagering & Media or Lotteries & Keno.

The group’s smaller Gaming Services business is also under review.

Offer price appears reasonable

Based on our existing Wagering & Media FY22F/23F forecasts, Entain’s revised proposal implies an EV/EBITDA multiple of 8.0x/7.8x. Given the ongoing competitive pressure facing the business from online bookmakers, in our view, the proposal valuation appears reasonable.

The implied multiple is materially below what Entain paid for Ladbrokes Coral in Mar-18 (c13.2x LTM EBITDA) and what Caesars Entertainment paid for William Hill in Apr-21 (c11.4x NTM EBITDA).

However, we think these premiums represent the greater scale of the individual targets, synergy benefits and far stronger growth prospects of the combined groups, particularly in the US online sports betting market.

Could undervalue medium-term potential of Wagering & Media

With the integration of UBET now largely complete, TAH was upbeat on the outlook for Wagering & Media at its 1H21 result.

TAH highlighted that the business’ focus is now turning to accelerating initiatives aimed at enhancing customer experience and ultimately, supporting the segment’s return to growth.

In the event TAH is able to execute its strategic initiatives and the recovery in FY22/23 earnings is stronger than we currently anticipate, the revised proposal could undervalue the segment on a more medium-term view.

Lotteries & Keno the jewel in the portfolio; Hold rating

Following TAH’s strategic review and proposal from Entain, we think the market will continue to value the company from a break-up perspective and consequently, move to a SOTP valuation (from DCF previously).

We derive a SOTP valuation range of A$4.92 to A$5.30 per share and set our price target at the mid-point (login to view).

This values Wagering & Media at A$3.5bn, Gaming Services at A$460-690m (4.0-6.0x EBITDA) and Lotteries & Keno at A$9.4-10.0bn (15.0-16.0x EBITDA).

Given the division’s dominant market position (essentially a monopoly asset), solid growth outlook and defensive earnings profile, we recognise it is possible the market could value Lotteries & Keno as a standalone entity on a higher multiple than we have currently assumed.

With TAH training broadly in line with our revised price target, we maintain a Hold rating. Risks detailed overleaf.

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