Tangling with Tabcorp in 1999

By Stephen Mayne
January 14, 2008

Tabcorp's Ross Wilson had been a favourite target since 1994, but the 1999 AGM was one of our last encounters. This was first published on November 10, 1999, in jeffed.com

Well, here we are back in a Kings Cross internet cafe having just purchased a weekly usage pass for $17 from a backpacking Californian manning the front desk.

I tried to offer him the $10 in gaming vouchers handed to shareholders at the TABCORP AGM today as part consideration but he politely declined.

Now Tabcorp is a company dear to the heart of Jeffed.com for a whole host of reasons I will spell out before net cafe closes at 11pm tonight.

Like last year, the meeting was held at the Carlton Crest Hotel in Albert Park which is not that easy to get at for a 10am start. The shareholder registration room was like something you would experience in Las Vegas, Monte Carlo, Sun City or at casinos around Australia. Given Tabcorp is now one of the world's biggest gambling, sorry entertainment, companies it was not surprising the natural light was blocked out, gaming vouchers were handed out and the mind-numbing noises of poker machines were ringing everywhere. Is there no escaping it?

Chairman Michael Robinson kicked off proceedings with a routine speech summarising Tabcorp's "milestone year" which failed to once mention the word gambling and which emphasised things like the $500 million Tabcorp kicked into state coffers last year and the "exciting times" ushered in with the $1.4 billion takeover of Star City casino. Michael talked about how Tabcorp was sponsoring the Victorian Surf Lifesaving movement - yes, Ross is a keen surfer - and deaths at the beaches were way down. This is great news but how about some gambling suicide debt stats, Michael. There's been more than 50 in Victoria since the pokies were introduced haven't there? Michael did stress the Community Support Fund was funnelling money into schools, hospitals and problem gambling. Shame most of it went to a "problem monumentalist" in Jeff Kennett who used it to build more unproductive edifices for himself.

Then it was time for chief executive Ross 'the boss' Wilson to, as he so aptly described it, "give it a bit of froth and bubble and get a bit of rock 'n roll going".

Ross explained how it had taken five years to complete the transformation of Tabcorp from moribund government bureaucracy to vibrant privatised super-performer.

"You will hardly see anything that is the same," gloated Ross as he showed pictures of the dowdy old Tabcorp head office compared with the purpose-built new headquarters he had built for the company where staff are now "enthusiastic and vibrant".

Then there was the "pretty incredible" 16.3 per cent compound growth in sale over five years as Tabcorp focused more "on the market and the customer" (read gambler).

Even better was the 27 per cent compound growth in profit as Ross got really excited at this "breakthrough" AGM.

It sure has been a case of let the good times role for Ross and the other lucky shareholders who bought in at $2.25 in the August 1994 float. Chairman Michael Robinson's legal firm Arthur Robinson Hedderwicks did the legal work for the float and as he pointed out, shareholder have already been returned $1.94 in cash.

That's right, in the sixth year after floating, shareholders will have totally recouped their investment in cash. This is unprecedented anywhere in the world for a big privatisation but, better still, the $2.25 shares have also increased almost five fold to about $11, generating almost $3 billion in capital profits.

And the Federal government, which got nothing out of the state-owned TAB, has pocked about $300 million in income tax on Tabcorp's super profits and probably the same again in capital gains taxes. The Kennett government asked for $410 million in "tax compensation" but sold the business anyway and then didn't get a red cent out of Canberra. What's another $410 million between friends as the then PM Paul Keating said to his entrepreneurial soul mate Jeff Kennett.

So who decided to sell this extraordinary cash machine SO CHEAPLY. Well, it was the Kennett government, wasn't it. Jeff and Treasurer Alan Stockdale were keen to get a privatisation away quickly after falling at the first hurdle with their TAC sell-off plans. So they rushed the Tabcorp float with indecent haste and sold it for a fraction of its potential value. After pillorying the previous management and talking the thing down, down, down. They then said sell, sell, sell before anyone realised what a goldmine it was.

And who advised the government. I believe that was Mike Tilley, then with Centaurus Corporate Finance and now, the chairman of Merrill Lynch Australia after his boutique advisory outfit was taken over in 1997.

And who was the first shareholder to stand up and second the motion approving the adoption of the accounts yesterday. Well, didn't that look remarkably like Peter Meurer, Mike Tilley's colleague at Merrill Lynch. And wasn't Merrill Lynch, or McIntosh Securities as it was then known Down Under, the lead broker to the Tabcorp float as selected by Tilley, who was sitting a few metres from Meurer at the meeting yesterday.

So what did that Merrill man Meurer say to Michael Robinson, who happens to sit on the Merrill Lynch advisory board, and the 300 cash-rich happy shareholders at the AGM. Surprise, surprise, he heartily congratulated the board because he was "surprised" by the performance of Tabcorp which was among "only a handful" of companies that have performed so well.

This gratuitous back scratching from a Tabcorp fee recipient - yes, that's right, Merrill picked up a few million advising on the Star City takeover - was a sign the board was worried about what was to come from non-stooge shareholders.

After a glitzy video showing lots of beautiful people walking around Star City - there was no mention of that chap Dalamangas who died after a fight with security guards last year - it was open to shareholders.

A regular critic, Mr Paris, opened up with a few shots at the board and Ross for his excessive salary.

Then jeffed.com got up and fired in a couple along the following lines.

Given that:

* The PM had said he was "ashamed" to discover from the draft Productivity Commission report that Australia had 21 per cent of the world's poker machines.

* The Bracks Labor government had some potentially adverse policies in the form of higher taxes and restrictions on pokies in poorer areas.

What regulatory and political risks did we face going forward?

Robbo started by attempting to demolish the Productivity Commission's credibility. He said the 21 per cent figure was "simply not correct" and it was really like 2.4 per cent. This was a bit strange. As an extremely happy Aristocrat shareholder - yes, we can proudly claim to be a world leader in pokies manufacturing with Aristocrat shares having quadruplued in a year - I'm sure their figures back up the ProdCom. Maybe, Michael is including pinball machines in his figures.

Robbo also said said definitional differences with the ProdCom would see Tabcorp's figure for problem gamblers at about two-thirds less than this independent government research body has suggested. He accused them publicly of proffering a figure that "grossly overstated" the reality.

The second aspect to Jeffed.com's first stint at the microphone related to the seemingly excessive price, $1.4 billion, paid for Star City. Afterall, if a mug punter like me had bought Star city shares at $1.23, Burswood at 77c and Crown manager Hudson Conway at about $2.50 last year when casinos were on the nose, why wasn't cash-rich Tabcorp also bottom fishing at the time. Instead, we waited for Packer to launch at Crown at 60c a share and since then his PBL shares have rocketed from $6 to a high of $11.20. Clearly, he got a bargain.

Compare that with Tabcorp which has seen its shares weaken by as much as 15 per cent since bidding about $1.50 a share in cash and paper for Star City, a venue no less an authority on casinos than Jeff Kennett has been lambasting for years as a "down-market leagues club".

Robbo explained that Tabcorp could not move until the $200 million Star City management contract came onto the market from US owners Harrahs. However, shareholders were assured it was a "perfect marriage" and Star City was an incredibly cash generator despite its distressed balance sheet.

As usual at Tabcorp, it was then time for some disgruntled customers to take the floor. Why wasn't the Auckland Cup broadcast, asked one Kiwi.

Ted, my best mate's dad, was sitting next to me. Now Ted is a retired school principal used to lecturing recalcitrant teenagers in rough government schools. But Ted was an AGM virgin and was reluctant to get up and ask questions so I had to have a second go, something I was keen to avoid after a grumpy Tabcorp shareholder last year called me "a bloody pain in the arse".

After four or five other shareholders had a go on a few relatively pedestrian matters, it was time for a second crack. Now Robbo wasn't encouraging multiple visits to the microphone so it was a case of asking about five quick questions at once.

The second offering asked whether Labor had the power tell Tabcorp where to put its pokies and to raise gambling taxes and whether the politicians could use the GST as an excuse to clobber gambling companies (just as they did to the tobacco companies last year). And if we did get clobbered, could we get in a return the lifting of the five per cent maximum shareholder limit which could allow management to get complacent and removes a takeover premium from the share price.

As reticent school principal Ted observed, Robbo again fudged the political question simply stating they expected their licence conditions to be adhered to. He did say they were very disappointed the Kennett government had promised Tabcorp investors an additional 10,000 poker machines which have now been banned. Jeffed.com reckons this was a flagrant abuse of the Corporations Law which unfortunately does not apply to governments.

Robbo also stressed that some of Tabcorp's best clubs and pubs are in high socio-economic areas. Just goes to show, problems gamblers can come from all walks of life and there are housing commission flats in Prahran, you know.

We then got to the really juicy bits of the meeting - the resolutions to give the board a big pay rise and Ross another $31 million worth of options.

Having sat there and watched Ross make $30 million on paper in five years, the board, which was assembled by Ross's mate Mike Tilley, clearly decided it was time to get in on the act. Hence the resolution asking for the maximum annual payout to be increased from $450,000 to $1.2 million.

Robbo did point out that three new non-exec directors were joining from Star City and that the probity tests in NSW were incredibly intrusive and exhaustive. Points well made Michael, but even so, the 12 member board of the $25 billion Commonwealth Bank has only just asked for an increase from $1 million to $1.5 million. Will Tabcorp ever need $1.2 million? Not in the next 10 years let's hope because Robbo did stress the fees would not rise to the maximum and he did not want to be rushing back asking for an increase each year.

Stan Mather from the Australian Shareholders Association quite rightly got up and objected to this one and his recommendation that shareholders vote No. Unlike the Republic, the Yes vote up but it was a similar margin even though Robbo boldly declared it carried on the show of hands.

Moving right along, the father of another great school mate of Jeffed's then got up with some technical questions which appeared to catch the board out on the wording of some proposed changes to the retirement allowances for directors. Chipmonk, you'd have been proud of your old man who was more courageous than school principal Ted.

Last, but definitely not least, it was time to debate the allocation of three million more options to Ross the boss. Mike Tilley must have been sitting there squirming as Robbo stressed how different this package was to the one which Premier Jeff photocopied so he'd know what to negotiate for himself in the private sector.

The hurdles are pretty steep and Jeffed has no problems with this aspect of the package. The problem relates to perception, particularly with Bracks and Labor making great play on attacking fat cats and returning taxpayer funded Olympic and Dockalnds tickets.

What would the Labor cabinet say to see Ross being issued options over another $30 million worth of Tabcorp shares when he's already $30 million in front on the first share package deal. Robbo made a good point that the board did not want Ross to "rest on his laurels".The analogy he used was that with these new options "he's got more Everests to climb".

This brings me to the key point about this whole debacle as far as the taxpayer is concerned. Tabcorp's gaming rollout was clearly mismanaged in government ownership because they opted for card-operated machines. With 50 per cent of the machines they had only 34 per cent of the revenue.

However, at the end of the day Tabcorp would be one of the easiest companies to run in the top 200. Before the Star takeover it operated in one Australian state, employing a few hundred people to operate their legislated wagering monopoly through its TABs and legislated half share of the pokies market under the government-mandated duopoly.

And they don't even have to operate the machines. All they have to do is find venues to host the machines and then get the venues to encourage people to walk in and stick $1 in the machine knowing they will only get 87c back. As former TAB chairman Peter Scanlon and Lloyd Williams have both told me: it is the easiest business in the world.

So while Ross has probably done a pretty good job, this idea that he is some sort of miracle worker is complete rubbish. If Jeffed.com's 100 year old grandfather was Tabcorp CEO the stock would probably be about $8 and he wouldn't have paid so much for Star City.

Basically this is a story of shareholders getting extremely lucky and extreme government incompetence. Taxpayers have missed out on about $3 billion which has gone to lucky shareholders and largely come from Victorians who cannot afford to gamble. It really is a sad story but one you don't hear with all the razzamatazz advertising promotions in the media and at gambling venues.

Just remind yourself that Australia is the gambling capital of the world and Tabcorp one of the biggest gambling companies in the world. Both Labor and Liberal should be ashamed that they together unleashed this beast which is now in the private sector doing what it's shareholders require. But at what cost to the broader community?

Till next time, Stephen Mayne