The EGM businesses were operated under a licence issued by the State government which was due to be renewed, or at least the companies thought so, sometime before the August 2012 expiry date of each licence.

But Mr Brumby ejected Tabcorp and Tatts in favour of a structure, which allowed the hotels and clubs to bid for individual premise licences according to the number of machines in each venue.

The auction proved to be a complete lemon generating a paltry $981 million, at least a billion short of what the government had hoped.

Tatts Group launched a statutory claim in the Supreme Court of Victoria as compensation for the loss of its gaming machine licence. Tatts’ claim for approximately $490 million was based on a complicated formula relating to the original licence payment of $598 million plus a half-share of the $981 million the Victorian government received from the sale of gaming machine entitlements to the clubs and pubs that bought them in the auction process in 2010.

Tabcorp paid $597.2 million for the grant of its licence back in 1994 when the company assumed responsibility from the Victorian TAB. The agreement allowed for compensation if new licences were issued with a formula that suggested compensation could be up to $686 million.

Tabcorp had good reason to believe this amount was payable as the State Budget had also assumed it would be for the 14 years from 1994 when the company was first listed on the stock exchange. Tabcorp’s IPO must have included the value of the licence which was passed on to the State government in the process.

But most analysts have long discounted the chance of any compensation being paid to either company following the change in legislation to the Gambling Regulation Act. Indeed, Tabcorp wrote off the remaining $461 million value of its gaming and wagering licence in 2008, more from an accounting perspective although it strongly reiterated its case to pursue the compensation. It’s not clear how much Tabcorp has spent on the litigation but it will have been considerable.

Tabcorp’s gaming machine business reported EBITDA in FY08 of $271 million, which valued that part of the group at approximately $2.5 billion just prior to the State government licence decision. That represented about 27% of Tabcorp’s enterprise value at the time, which included the casino business before it was demerged from the group.

For Tatts, the impact was even greater at the time as gaming machines represented $2.2 billion or 42% of group enterprise value.

Tabcorp’s market capitalisation on 10 April 2008 was $7.5 billion prior to the announcement. By the end of June 2008, its market value had declined to just over $5.1 billion.

Tatts’ market capitalisation suffered even more harshly dropping from $4.6 billion to just under $3 billion over the same time period.

Both companies reported an aggregate of $1.5 billion in write-downs in the 2008 financial year.

The damage was irreparable.

Tatts has gone on to substantially rebuild its business through acquisitions of other state lottery businesses and has made a good fist of that strategy.

Tabcorp demerged its casino business into what is now Echo Entertainment. The core of the Tabcorp business is still operating wagering licences around the country but is a shadow of its former self.

Tabcorp (TAH)

So it’s probably off to the Appeal Court for Tabcorp. Tatts Group might just be throwing a small victory party soon. Mr Brumby is unlikely to be on the guest list.

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