Australia's Tabcorp, Tatts may lose gaming duopoly

The Victorian government announced Thursday April 10th that it would be allowing clubs and pubs to control their own gaming machines as well as own them starting in 2012. This is a big problem for Tabcorp and Tatts who currently control the gaming machine licenses in the state. The announcement has understandably ruffled a few feathers and caused some internal changes to get started while there is still time before the changes. The change is part of many gambling reforms that include opening licensing to competition for other forms of gambling such as keno, a type of bingo and other betting. Victoria is the second most populous state in Australia and as such contributes greatly to revenues.

The new laws will allow Tabcorp and Tatts to buy clubs and pubs to have gaming machines in, but not more than thirty-five percent of the total can be owned by one company. While this may not sound like enough to a large company like Tabcorp or Tatts, smaller venues worry that it will lead to only three or four large players and very few smaller venues being able to compete. This is even before it is taken into account how much the bid for licensing may cost. Obviously larger corporations will have more funding to bid for a greater number of licenses than a small community owned business. ALH is known to own over the 35% cap of venues already, which could be a problem if they opted to try and put gaming machines in each they owned. Most of the one hundred pubs they own have gaming machines, which could cause a problem. Also standing to gain from this is Woolworths Ltd, another big pub owner. Officials have said these things will be taken into consideration as the details of the new laws are confirmed.

Victorian revenues from gaming made up roughly twenty-five percent of Tabcorp's first half profits, while they made up almost half of Tatts first half earnings. An estimated five hundred million in profits is made by both companies combined from poker machines in Victoria. While both companies will be able to operate machines under the new laws it will not be at the same level of profit. This is in part due tot he cap on how many they can operate, based on a percentage of venues available. Both have indicated they will seek to branch out to other markets in Australia, and optimize profits in Victoria instead of just leaving altogether.

As the news settled in, both Tatts and Tabcorp have replied to the news. Obvious decisions of restructuring and slashing of expenditures and costs will be done with both companies, Tatts estimates forty million will need to be trimmed from their side. They are looking into diversifying into other avenues that would use similar skills in IT and network strategies. Having four years to work towards the new laws will hopefully allow them enough time to have a new earning strategy in place before the new laws take effect.

Tabcorp is planning on going after the government for refusing to refund the amount that will be outstanding on the licensing fees, estimated at five hundred ninety-seven million. This was something the government had committed to repaying in 1994 at the time of Tabcorp's share market float. Obviously losing these fees would add insult to injury. They are willing to enter into litigation if necessary and have reflected that the refusal to refund the fees is merely a matter of public image, as it would look better to fight the refund than to just hand over the money without a fight.

The new licenses will only be for ten years instead of the current twenty. This will hopefully allow for quicker entry and exit from owning gaming machines in pubs and clubs which is optimal for smaller owners but not for larger companies owning more establishments. This is also anticipated to help make operators more accountable to the towns and communities they are in, compared to companies taking over and doing as they wish for a long period of time. Australia has twenty-one percent of the world's total gaming machines, which amounts to over two hundred thousand. Welfare agencies estimate over three hundred thousand Australians have a gambling problem, so allowing pubs and clubs to be more accountable could be a step in the right direction.

The current setup gives twenty-five percent of Tabcorps gaming machine profits to the horse racing industry, which will no longer happen after the new laws take effect. Officials have promised the new laws and tax setups will adequately replace the current setup, but many remain suspicious. The government does anticipate offering lower tax rates to smaller businesses to help them compete with large companies. The government has made the decision that the ideas put in place years ago are not and may not be the best for Victoria in the future. This is why there seems to be such a large change in the thought pattern behind the laws instead of smaller changes as are common. Whether or not this will be enough to shift the market in the manner the government wants has yet to be seen until all the details are finalized and the first couple years under the new laws can be analyzed.

Since the announcements both companies have had their stock drop as investors are understandably concerned about the companies' futures.Their stocks were seen to drop an average of twenty to close to thirty percent with the low being even more. Until some issues such as a refund and how many venues the companies are able to acquire in hopes to bid on gaming licenses as soon as 2010 in preparation for the 2012 changes the stocks will most likely stay weak. After statements from both companies they will most likely not drop as far again, especially as the further detail their plans to work around the new changes. A refund by the government would also boost share prices.