A group that operates a number of gaming venues around Victoria was faced with the uncertainty surrounding the Victorian Gaming Gambling Licences Review.

In April 2008, the Victorian State Government announced plans to abolish the TABCORP/Tattersall’s duopoly, and replace it with a venue-operator system. As a result, the group was preparing to purchase gaming ‘entitlements’ at an unknown price, as well as forecast the associated costs of purchasing and maintaining gaming machines.

We were engaged by the group to provide forecasts of the likely cash flows between 2009 and 2022, and offer guidance on the maximum price that could be paid for each entitlement. Specifically, Ferrier Hodgson prepared for the group’s management a discounted cash flow model incorporating:

• The venues’ current performance, subject to adjustments for future maintainability of cash flows;
• Future capital expenditure expected to be incurred by the group, for example for the refurbishment of the group’s older venues;
• Variable inputs for the purchase price of entitlements, and the cost of acquiring and maintaining the physical machines or leasing them;
• The borrowing costs associated with the purchase of gaming entitlements and/or machines;
• A discounting component to allow Ferrier Hodgson to determine and offer advice on a maximum value for the entitlements; and
• A sensitivity analysis on the model’s assumption of the price per entitlement.
  

Ferrier Hodgson provided the group’s management with detailed forecasts and analysis to enable them to prepare for the auction and make decisions on the best options available.

On 10 May 2010, after a 10 hour competitive bidding process, the group successfully acquired its gaming entitlements. The relatively low price paid for each entitlement means the group can now focus on reducing its debt to more manageable levels, and use the remaining cash flows to upgrade its venues.