Down on their luck

Management’s hunger for growth has left Tabcorp shareholders facing the risk of a painful capital raising

- Graham Witcomb

Nothing is more upsetting than the spectacle of an imperial chairman selling stock to “satisfy personal commitments” when the company they oversee is going through its biggest crisis in years.

We don’t know why Tabcorp’s Paula Dwyer sold a third of her ownership stake in March (after the stock lost half its value), but it doesn’t fill us with confidence.

Tabcorp’s board and management own hardly any shares as it is. Cumulatively, they hold around $4.2 million worth of stock, yet were paid $7.3 million in salaries and bonuses last year.

With no skin in the game, management’s interests aren’t well aligned with those of shareholders, although Tabcorp has some incredible assets working for it and we expect it to do well over the long term.

Our concern with the company has little to do with its operations. These are tough times for its wagering business, but its monopoly over Australian lotteries should get it through to the other side. The worry is that management, hungry for growth, has unnecessarily taken on too much debt during good times and will now dilute shareholders with a capital raising to clean up its messy balance sheet.

Tabcorp has $3.8 billion of debt, $1.4 billion of which is bank debt and the rest from US private placements. Thankfully maturities are spread out, with the bulk not falling due until after 2028. The next substantial debt rollover of $172 million occurs in December and there’s a further $821 million due in 2022.