WHEN Tattersall’s announced in June its bid to run the UK lottery, few outside the gambling world had heard of the Australian lottery and gaming-machine operator. One Sydney analyst described it as “not your typical corporation”.
Indeed, Tattersall’s colourful past is sure to fascinate the panel that picks the winning bid after the deadline for entries passes in December. For more than 100 years it was run rather like a secret society, and is accused in Australia of preying on problem gamblers.
The competition for the lucrative 10-year licence to operate the lottery from 2009 will be the most intense yet. The winner must satisfy a rigid set of tests set by the UK National Lottery Commission. It must be
a fit and proper organisation with a proven record and, most of all, meet the strict regulations governing the lottery.
Tattersall’s said that with a record of 110 years of continuous government-licensed lottery operations, it believed it would be a credible bidder for the UK licence and was confident its bid would be well received by the UK National Lottery Commission.
It said the bid was part of a strategy to diversify and expand internationally, as outlined in its prospectus ahead of its July 2005 listing on the Australian Stock Exchange.
Duncan Fischer, the company’s chief executive, lives and breathes the gambling industry. An accountant by training, Fischer arrived in Australia from South Africa in 1977. Throughout the 1980s he worked as a consultant to various lotteries and gaming operators and was hired in 1992 as Tattersall’s chief financial officer. In 2000 he became chief executive and has since overseen the company’s listing on the Australian Stock Exchange, a tortuous, bruising process.
Fischer eschews the term gambling, preferring to call it “gaming”. He said: “It’s alive. We’ve got a lot of balls in the air at any one time. It involves very direct branding, customer communication, absolute integrity around systems, dealings with governments, managing a network and, of course, one of the fantastic parts of the job is philanthropy. I don’t think there’s another business or industry I’ve been associated with that gives you that broad spread and involvement in a whole host of areas. It’s very exciting.”
Tattersall’s is one of the world’s few listed lottery operators. It is also one of the largest purveyors of “pokies”, or fruit machines, with a foothold in the UK market through the £6.4m purchase of a 10.1% stake in Talarius, which owns 167 electronic gaming venues offering 8,000 fruit machines.
Yet Tattersall’s hopes of winning the UK lottery licence hinge not on scale, or longevity, but on financial efficiency. It is one of the most cost-efficient lottery operators in the world.
“That’s a core competency,” said Cameron McKnight, gaming analyst at JP Morgan in Sydney. Tattersall’s operates at a net margin of 3%, one of the lowest in the industry.
In the struggle to run the lottery, financial control will be a vital factor. For every pound spent, the operator receives only 5p (of the rest, 50p goes to the winner, 28p to good causes, 12p to the government and 5p to retailers). McKnight said: “The lottery operator has 5p to cover operating expenses and provide a return on capital. Yet that 5p will be bid down.”
Tattersall’s has been able to withstand severe pressure on costs by virtue of a blessed business environment. For 120 years it has enjoyed a monopoly as the only lottery operator in the state of Victoria.
“In Victoria, the brand is ubiquitous; it has a monopoly,” said McKnight. Indeed, Tattersall’s boasts that “35% of Melbourne’s adult population play Tattersall’s lottery games each week”. More than half the Melbourne adult population plays Tattersall’s primary lottery draw, Tattslotto, at least once over a 12-month period.
Tattersall’s also shares with rival Tabcorp control of the state’s pokie market. Each company is authorised to operate a maximum of 13,750 machines.
The arrangement allows them the freedom to concentrate their machines in the poorer parts of the state, where gambling revenues are highest. Many social studies have confirmed the fact that low-income earners spend, and lose, a far greater proportion of their income through the pokies.
“They’re freely able to allocate gaming machines in pubs and clubs where they get the highest turnover per day,” said a Melbourne gaming analyst. “The result is that, although Victoria has a third of New South Wales’s gaming machines, its total revenue is about the same.”
Indeed, Tattersall’s is unique in the gaming world. Nearly every club and bar in Victoria has signs advertising either Tatts Pokies or Tatts Lotto.
But its market power has drawn severe criticism in Australia: the Salvation Army, the Methodist Church, Gamblers’ Anonymous and large sections of the local press regularly accuse Tattersall’s of preying on problem gamblers who tend to live in the poorest areas of Victoria.
Perhaps most damaging was an ABC documentary last October that accused the company of ruining families and destroying lives.
Tattersall’s has weathered these attacks with the help of a succession of complicit state governments that privately applaud the organisation as a source of billions of dollars of revenue (the Australian states, all of which are Labour-run, suck in a hefty percentage of gambling revenue). Tattersall’s critics view this as a tax in kind on the poor.
Fischer, in a rare public response, recently rejected the criticisms as “unfounded (and) ignorant”. He argued that Tattersall’s did not want or need problem gamblers as customers. His candour was unusual: Tattersall’s rarely speaks to the press, and prefers to keep a very low profile.
The origins of the company’s dominant place in the Australian gaming industry are buried in its secretive past. For almost 120 years, before it floated last July, Tattersall’s was a privately run mutual organisation in effect owned by anonymous beneficiaries.
The arrangement began in 1904, when Tattersall’s founder, George Adams, a Victorian horse trader, died. He left a detailed will that instructed his private company to distribute its profits among his heirs, which included family, staff and selected charities. In so doing, he turned Tattersall’s into the private fiefdom of some 2,000 anonymous “Names”. Tattersall’s Names were never accountable to shareholders, public bodies or the government.
At the height of their involvement, the Names shared among themselves more than £40m in gambling proceeds a year. They were the great and the good of Victoria’s “Melbourne Club”, typically men such as David Jones, Tattersall’s chairman, who permeates Melbourne’s boardrooms and is chairman of the Melbourne Cricket Club, the bastion of blue-blooded Victorian power-brokers.
Public pressure for reform prompted a reluctant Victorian government to take action. It was argued that Tattersall’s Names drew their immense wealth from a public facility — the lottery — that should be run transparently like the electricity grid or the road system, and open to public ownership. Tattersall’s Names had earned a substantial rent from a public asset, argued the state government in justifying the case for a public float.
The stage was set for one of the biggest punch-ups in Australian corporate history. To start, the Names all received windfall payments of millions of dollars, provoking envy and outrage among prospective investors. And the four trustees — who technically owned the trust on behalf of the beneficiaries — demanded a lump sum of £10m each, according to a provision in the trust deed that they should receive the payment in the event the trust was wound up.
This infuriated the beneficiaries who argued that the trustees did little more than attend 12 meetings a year, and sparked a legal battle that is still running today.
Tattersall’s has publicly shrugged off the controversy, and says it is pursuing a global expansion plan “to become a leading international provider of gaming-based products and services”.
In addition to its UK interests, in 1999 it became a 10% founding shareholder in Uthingo, the South African lottery (Fischer was born in Johannesburg and grew up in Mafeking). In Australia, Tattersall’s is locked in battle with Tabcorp to acquire Unitab, a Queensland wagering business that owns the pokie machine monitoring business.
Investors have been unimpressed, and the share price has plunged this year. Since flotation Tattersall’s share price has dropped by more than 17% to A$2.85, valuing the company at £815m.
It is now under pressure to diversify: at present 88% of its revenues come from Victoria, where its licence to run the lottery expires shortly. The British national lottery is one hope on a rather desolate horizon.
