Tabcorp Holdings Limited (BET) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Tabcorp Market Update. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Gillon McLachlan, Managing Director and CEO. Please go ahead.

Good morning all, and thank you for joining us. I'm Gillon McLachlan. I'm joined on the call by our CFO, Mark Howell; and COO, Rob Fraser. This morning, we announced an agreement to acquire 100% of the issued shares in BetMakers Technology Group by way of a scheme of arrangement for consideration of $0.24 per share. There is an option for BetMakers shareholders to receive a portion of their consideration in Tabcorp scrip with the Tabcorp scrip to be issued at a minimum of $1 per share. The acquisition of BetMakers represents a unique opportunity to accelerate our transformation to a modernized technology-led company and establish a global B2B growth engine. BetMakers is a business we know well. We've had a commercial relationship for a long time and have watched as Jake and his team successfully transformed into a lean and profitable technology business with an entrepreneurial culture. I'll take the presentation as read and provide you with an overview of our thinking before handing over to Mark to step you through the financials. You'll see on Slide 4, there are four parts to our strategic rationale for this acquisition. Firstly, it accelerates our technology modernization. This deal will enable us to fast track to a leaner cloud-native technology stack. Put simply, we expect to deliver products to market faster and will cost us less to run. The modernized platform will create product innovation opportunities at a new speed for Tabcorp. This means faster speed to market, new features and new user experiences across both our TAB and B2B offerings. The tech modernization is also expected to unlock opportunities in the media space, including evolved vision production capability. Secondly, we're creating a global B2B business that will deliver vision services and deeper pools for professional funders. Our international businesses like PGI and Sky Racing World contribute $350 million in revenue annually and are an often underappreciated component of our company. We will create greater scale and diversification globally with an end-to-end offering across both wagering and media. BetMakers complementary assets will assist in executing that ambition. The opportunity is more to co-hosting and co-mingling opportunities, enhanced vision, data, technology and distribution capabilities. I would note that Tabcorp, via its global media business, SKY, is a well-established wholesaler of racing vision to Australian and international bookmakers. As part of this service, we have a close working relationship with our partners to deliver bespoke vision feeds with integrated branding, odds and data services. This is a model we are committed to, and this deal will assist us in expanding our wholesale solutions as a data, vision and wagering services provider. Thirdly, we'll welcome new talent. BetMakers team has significant capability, which we will benefit from, including the early adoption of AI. They're proven in digital transformation and we'll harness that capability. Their focus on being lean and efficient and fast aligns with the culture that we are building at Tabcorp. The fourth pillar behind doing this deal is the attractive financials. We'll deliver a more efficient cost base and CapEx profile. We are targeting a run rate of $30 million of cost synergies to be delivered by the end of year 2 of our ownership. There is also further revenue upside from the international B2B growth opportunities that the combined business will target. Both businesses will be stronger together. We expect the transaction to deliver double-digit EPS accretion from year 3, whilst our balance sheet will remain strong with pro forma leverage of 1.9x at December '25, enabling flexibility for further growth and execution. We've also ensured strong alignment with BetMakers. Key executives will be retained and incentivized to ensure we deliver the integration and realize the synergies. It's a deal that makes sense. We're transforming our company strategically and BetMakers are very complementary. I'll now hand to Mark to talk you through the financial slides.

Thanks, Gil. Good morning, everyone. Like Gil, I'm excited to be talking to you this morning about what we believe is a highly compelling opportunity for Tabcorp to accelerate our strategy. Slide 3 covers the key terms of the transaction. I'll keep it to the headlines. On deal terms, Tabcorp will acquire BetMakers at $0.24 per share on a fully diluted basis. That implies an equity value of $283 million and an enterprise value of $267 million. The offer represents a premium of approximately 42% and 37% to 3- and 6-month VWAP, respectively. It implies an EV June 26 pro forma EBITDA multiple of 6.1x, including the full run rate cost synergies. The consideration will be funded primarily with available cash and undrawn debt facilities with up to a maximum aggregate of 25% scrip at the election of BetMakers shareholders. To the extent that BetMakers shareholders elect to receive scrip, Tabcorp shares will be issued at the greater of $1, a 12% premium to Tabcorp's last close or a 5-day VWAP prior to the scheme record date. To the extent scrip elections exceed the cap, elections will be scaled back on a pro forma basis. As Gil noted earlier, we are targeting a run rate of $30 million of cost synergies by the end of year 2. The transaction is expected to be EPS accretive from year 2 and deliver double-digit EPS accretion from year 3. Pro forma net debt to EBITDA is 1.9x, well within our target leverage range of less than 2.5x through the cycle. I note this pro forma leverage is calculated based on earnings and net debt levels of the combined businesses as at 31 December '25. We will update pro forma leverage calculations at our full year results on the 26th of August when we roll forward the calculation to June 26. The BetMakers Board unanimously recommends the transaction and intend to vote their shares in favor of the transaction, subject to the usual conditions. The transaction will require approval by BetMakers shareholders. It would also be subject to court approval, ACCC clearance and the receipt of required regulatory approvals in certain jurisdictions in which BetMakers operates. Completion is targeted for the third quarter of FY27. Turning to Slide 8. As I mentioned, we are targeting a run rate of $30 million of cost synergies by the end of year 2 of our ownership. The synergies are largely tech-based and primarily relate to Tabcorp's cost base. They'll come from a material simplification of our product development workflow following the adoption of the BetMakers product suite, rationalization of data centers, corporate applications and technology contracts as well as efficiencies across corporate and support functions. In addition, we see significant upside from international revenue growth opportunities. The combined business will deliver an expanded offering that unlocks the full growth potential of our unique existing international media and Tote assets, as Gil touched on earlier. For our shareholders, the financial outcomes are compelling with double-digit expected EPS accretion whilst maintaining a strong balance sheet. I have already talked through the key details of Slide 9, which provides a summary of how we intend to fund the transaction. I'll now hand back to Gil to make some closing remarks.

Thanks, Mark. Today is an important day for our company with an opportunity to fast track our transformation. We believe with BetMakers, we can create faster speed to market with greater cost efficiency. We'll benefit from bringing our complementary assets together to grow scale and diversify globally. To reiterate, this acquisition accelerates our technology modernization and uplifts capability. Building on our existing international assets, we will now establish a global B2B growth engine, creating a differentiated offering for the international market. We're committed to delivering the targeted run rate of $30 million of cost synergies with further potential revenue growth opportunities. And finally, the transaction delivers attractive financial returns for our shareholders while maintaining a strong balance sheet position for future growth. We'll be relentless in executing the integration and delivering the synergies and value that we see in this deal. I'm now happy to take your questions along with Mark and Rob, who leads our technology and product teams.

[Operator Instructions] First question from Andre Fromyhr from UBS.

Just wanted to ask about the targeted $30 million per annum of cost synergies. I guess the first part of the question is if the benefits are primarily derived from the existing Tabcorp cost base, what is it about this transaction that allows you to do that, that you couldn't have otherwise pursued for your own sort of tech overhaul that self-led?

Andre, it's Rob Fraser. Primarily, the BetMakers team have significantly transformed their technology environment and the technology stack. Tabcorp in comparison still has a lot of legacy, a mix of on-prem and cloud infrastructure for data centers, and a range of obviously, third-party services supporting all that. Essentially, the cost synergies will be delivered with BetMakers much faster and cheaper than we would be able to do ourselves. And that's borne out of some detailed analysis of the alternative options as well. So Mark, I don't know if you want to make a comment there, but that's essentially the background.

Yes. Look, the only other thing I'd say, Andre, as we thought about it, I mean, as Rob said, it was sort of the cheapest and most efficient way home and in our view, was also the lowest risk option we had ahead of us to modernize the tech stack.

Okay. And then if I could just follow up on that. I guess it's been a while since Tabcorp has done M&A and been through an integration process. I guess, if anything, it's gone the other way following the demerger a few years ago. So can you talk us through why you've got the confidence that you'll achieve that scale of cost synergy in that time? And is that -- I understand that's a necessary condition to get the double-digit accretion in year 3 is having the run rate completed by year 2.

Thanks, Andre. It's Gil. I'll make some comments and hand over to Rob as well. I think who's been leading transformation of the business for some time. I think that we have a willing partner in this, and I think we'll have the support in the migration of the BetMaker team. I think that's very important, and they'll be participating in this, and they've got a history of turning the business around and leaning into the exact integration story we'll be talking about in terms of the cost and the change. We've distributed across new resources. A lot of the team will be running this are new. Rob will be leading and the technology piece. Sharon broadly running the operating efficiency piece. Gerard Delaney will be running the international growth piece, and Mark will have overall responsibility. So we'll be partnering strongly with BetMakers. We've got a team that's clear. Their targets are established, and we've got a structure in place that we think will see us through. And the, I hope, an emerging culture at Tabcorp of doing what we say and being very disciplined and relentless about delivering what we've said to the market and our shareholders that we will do. And there's that focus, that clear alignment and structure and a clear plan that's been established over many months of work, I think you see us in good stead.

Just add a bit of color as well, Andre. Although the last significant activity, as you mentioned, was the demerger of lotteries, that covered all aspects of our technology environment in a great level of detail. And a lot of the team that will drive the integration here were deeply involved in that demerger process. So they're intimate knowledge of all the systems and what it will take. Equally, on the BetMakers side, they have a deep set of knowledge and experience around these same systems as well and obviously, what it takes to modernize those systems. So we think the combination of those two will hold us in good stead, but we have some deep experience on this side for this type of process, too.

Next, we have Liam Robertson from Jarden.

Look, just firstly, on the timing, obviously, a sizable transaction. I appreciate you guys have got plenty going on in the business, not least the AUSTRAC proceeding. I guess should we read into this deal that you've got confidence in, I guess, a manageable outcome from an AUSTRAC perspective?

Liam, I'm not going to make any comment on that. I don't think that's appropriate other than we are -- made the comments that we're remediating our business and the compliance teams genuinely fast and have been since we got there. We feel we've got the right people, and we will lean into any issues that come that way with great transparency and all the seriousness required, that is a comment. And more broadly, we are committed to not being distracted across the business. These things are a history of taking some time to resolve. We are committed to moving forward with our strategic agenda and dealing with both issues with our full attention. So I don't believe there's anything you should read into the AUSTRAC stuff other than we are taking that as seriously as it should be and with great transparency and put the right resources around that. And then we are getting on with the rest of our business in parallel, and this is an important step in our transformation journey.

Very clear. And then just secondly, in terms of, I guess, the revenue breakdown, obviously, helpful in providing some of the contracts, the breakdown between top 10 customers, et cetera, in the back. I guess just with several of BetMakers customers being your direct competitors, do the contracts have, I guess, change of control clauses? And can you give us a sense of the terms remaining on some of those contracts?

I'm not going to get into all of that, Liam, the details other than to say there is a level of tenure and comfort in all the agreements we have. And we have a history, in my view, through SKY vision of actually having wholesale relationships with our competitors. We have good relationships with them. We will -- and I have, and will be continuing to engage in discussions that we will deliver those services with integrity and fairly. And I think we hope that our history in doing that with SKY vision sets a good precedent that we actually can be competing in the B2C space and also have wholesale relationships ongoing. And frankly, these are wholesale relationships, I hope to expand into lots of different areas as we diversify and change the shape of our business.

Perfect. And then just last one, more of a near-term financial one. I guess, can you give us a sense of some of the integration costs you'll be expecting? I mean I'm conscious it doesn't sound like the deal will be accretive in year 1. So just trying to, I guess, wrap our head around what some of those incremental costs outside of the financing-related costs will be.