M&a Analysis

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Part 1: Estimation of demerged entities’ future earnings

Tabcorp Holdings Limited (ASX: TAH, “Tabcorp”) announced a demerger on 18th October, 2010. The Company separated into two entities: the casino business was operating as an independent entity, Echo Entertainment Group (“Echo”) ever since, and the waging business was still operating under Tabcorp. The two entities announced their respective annual report for financial year 2011.

Based on the historical financial data, we applied pro-forma statement method to forecast the two company’s earnings for financial years 2012-2016. The main forecast includes revenue, EBITDA (for continuing operations), EBIT and NPAT. Our forecast applies the percentage-of-sales method, and only takes continuing operation items into consideration. Discontinuing profits/losses such as impairment are out of the scope of this forecast.

The main forecast results are set below.

Tabcorp Holdings

Echo Group:

From the forecast above we can find that Tabcorp’s operating revenue is estimated to grow at a rate of 4% per year in 2012-2016, and its NPAT grows at an average of 1%. For comparison, Echo’s revenue grows by 7% each year, and its NPAT grows by 4%.

We also summarized the financial performance of Tabcorp before its demerging as follows:

This suggests an average of only 3% annual growth in revenue and 2% growth in NPAT during the year 2007-2010.

Based on that estimation, we compared the sum of estimated earnings of the two entities, with projected earnings for them assuming that they continue to operate as one entity.

The results suggest that the two entities generate higher revenue and NPAT than that they can generate as one entity.
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