Tabcorp (ASX:TAH) share price jumps as possible legal action threatens $11b demerger

The gambling giant is facing a challenge to its proposed demerger. Here are the details.

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Key points

  • Racing NSW is threatening to use the courts to scuttle Tabcorp's demerger plans
  • The racing body wants management to provide guarantee that the payments it gets from Tabcorp won’t be adversely affected by the break-up.
  • Investors may not be worried as Tabcorp says it doesn’t need approval from Racing NSW for the deal to proceed

The Tabcorp Holdings Limited (ASX: TAH) share price is climbing today despite Racing NSW threatening to block its upcoming $11 billion demerger.

The New South Wales racing body is slamming the plan for Tabcorp to separate its lucrative lottery arm and its struggling wagering business, reported The Australian.

But investors appear to be unfazed. At the time of writing, the Tabcorp share price is up 2.62% to $5.48. For comparison, the S&P/ASX 200 Index (ASX: XJO) is currently flat.

Tabcorp demerger angers Racing NSW

Racing NSW wants Tabcorp to provide guarantees to protect the income the ASX company pays to the agency.

Otherwise, Racing NSW is warning it could look to the courts to stop the break-up.

"I have to protect the interests of the 50,000 participants in the racing industry in NSW and unless (Tabcorp) negotiate with us we will be left with no other option," Racing NSW chief executive Peter V'landys was quoted in The Australian as saying.

"It's no secret that Tabcorp's wagering division is running poorly and that they are trying to offload a sinking ship."

Racing NSW has a history of using the courts to get its way. This includes famously winning its case against corporate bookmakers in the High Court a decade ago that delivered hundreds of millions to racing.

How big is the legal threat to the Tabcorp share price?

However, investors may have been reassured by Tabcorp saying it doesn't need the blessing of racing bodies. This includes Racing NSW, although it does require other regulatory clearances before the spin-off.

Tabcorp's outgoing chief executive David Attenborough has also played down the risk of Racing NSW's legal threats, saying management was "focused on ensuring both businesses (lotteries and wagering) perform at their best".

No surprise to shareholders

Investors also won't be surprised by the sabre rattling by Racing NSW. This risk was clearly laid out in Tabcorp's demerger scheme booklet.

The company revealed it received correspondence from the body in the past year alleging the transaction would "adversely impact" the racing industry.

It also asserted that the deal would reduce the financial returns to Racing NSW and would be in breach of the agreement it has with Tabcorp.

Why the breakup could be good for the Tabcorp share price

However, shareholders are looking forward to the spin-off. History has shown that corporate break-ups often deliver superior returns to shareholders.

This includes the BHP Group Ltd (ASX: BHP) and South32 Ltd (ASX: S32) separation and the Wesfarmers Ltd (ASX: WES) and Coles Group Ltd (ASX: COL) break up – just to name a few.

The Tabcorp share price has gained around 16% over the past year, while the ASX 200 is up around 10%.

Motley Fool contributor Brendon Lau owns BHP Billiton Limited and South32 Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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