Why the Tabcorp Holdings share price fell on Monday

We examine the key details of the gaming company’s announced demerger of its lotteries and keno business.

Tabcorp falls

The Tabcorp Holdings (ticker: TAH) share price fell on Monday after the gaming company announced plans to demerge its lotteries and keno business.

This decision comes after the company completed a detailed strategic review into its business holdings, ultimately concluding that such a spin-off would be the best way to 'maximise value for shareholders.'

Should the demerger proceed unopposed and in its current form, the company would be divided into two publicly listed, standalone businesses: Lotteries & KenoCo and Wagering and GamingCo.

According the Tabcorp, its Lotteries & Keno business boasts a number of appealing characteristics, including low capital intensity and ‘infrastructure like qualities.’

The Chief Executive Designated for this business would be Sue van der Merwe.

By comparison, management said its Wagering and GamingCo business (Tabcorp's Wagering & Media and Gaming Services business), has a number of organic growth options, while also saying that it may benefit from 'future domestic structural reform and further international expansion’.

Moreover, according to Tabcorp Chairman, Steven Gregg:

'Following the operational review of Gaming Services, which is being implemented, the businesses will continued as the largest gaming services provider in Australia with a simplified business model and streamlined operating cost base.’

The Chief Executive designated for this business would be Adam Rytenskild.

Examining the rationale behind the spin-off in more detail, management noted that the demerger would create 'two market leading businesses', allow for ‘optimised capital structures’, while also giving investors the chance to benefit from the 'increased scale and diversification already achieved through the combination with Tatts Group.’

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Other considerations

Beyond everything noted above, below we highlight some of the other key implications that traders and investors may want to be aware of.

For one, current Tabcorp investors would receive shares in the new, demerged Lotteries & Keno business proportionate to their current shareholdings, while retaining their Tabcorp stock.

Secondly, looking at the expected financial impact of the proposed demerger, it was noted that the company expected to incur one-off separation costs of between $225-275 million and annual ongoing fees of between $40-45 million.

The company added that it would provide the market with further colour on its demerger plans as part of its upcoming full-year results announcement, expected to take place 18 August.

Finally, management said the aim was for the spin-off to be completed by the close of June, 2022.

The market responded with decisive scepticism to the demerger announcement, with the stock closing out the session down 4.44% at $4.97 per share.

Despite that, year-to-date the Tabcorp share price has performed strongly, gaining 24.56% in that period.

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