Published: June 21, 2022

New South Wales Australia cancels plans to sell the state’s $500 million a year lotteries duties, Australian and offshore pension funds forced to move on

NSW has cancelled plans to sell the state’s $500 million a year lotteries duties, leaving Australian and offshore pension funds searching for the next $15 billion opportunity.

In budget papers released on Tuesday, the state said it had considered scoping study findings and potential buyer appetite, before deciding to retain the income stream.

“Following the completion of a scoping study, and careful consideration of the costs and overall risks of such a transaction, the NSW Government has determined that it will not proceed with a transaction to monetise its lotteries duty revenues stream,” the budget papers said.

NSW Treasury declined to comment further.

NSW said it expected to make $575 million from in lotteries and lotto taxes in the 2021-22, and $520 million to $554 million a year through the four-year forecast period.

The decision will come as a surprise to deal-hungry pension funds, sovereign wealth funds and their bankers, who met with the state and its representatives as part of last year’s scoping study. [Bank of America, Herbert Smith Freehills and EY advised the state.]

Consensus among the potential buyers is that the duties could’ve been worth up to 30 times annual earnings, or about $15 billion, if the state offered a 40 year or 50 year contract.

High stakes

Whoever bought it would’ve borrowed heavily to fund it, knowing the income stream was a tax payable to the state and ranked above just about everything else in the capital structure.

The likes of Ontario Teachers’ Pension Plan, CDPQ, ADIA and GIC were said to have been keen to take a closer look, along with Australia’s big superannuation funds. Investment bankers were keeping potential suitors warm, while lending banks were also circling.

Instead, the private capital heavyweights will have to look elsewhere for their next chunky deal. There was nothing in the NSW government about any other potential asset sales, and is unlikely anything pop up in the coming year with an election on the horizon.

The obvious place to go looking for a similar exposure is newly listed The Lottery Corporation, which was spun out of Tabcorp in May.

The Lottery Corporation has the licence to run NSW’s lotteries - the entity that collects the taxes and pays them to NSW - until 2050. Tatts Group bought the right to NSW Lotteries in 2010, before it was sold to Tabcorp and then spun out into The Lottery Corporation.

While The Lottery Corporation owns a bunch of other licences, it is not likely to attract as high a valuation as NSW selling its duties. Still, it’s a similar defensive earnings story; its shares are trading at 18-times forecast EBITDA according to S&P Global Markets Research data.

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