Thursday, 7 February 2013

Something had to give

Something had to give.

In a capital hungry business with falling profits, ageing assets and demanding shareholders, something had to give.

The following chart shows the pattern of after tax profits for Federal Hotels over the last 7 years.

The columns represent after tax profits, the peak of $27.1 million was achieved in 2009/10. The blue bits represent the dividends paid to the six shareholders from after tax profits, leaving the red bits as the retained earnings after tax and dividends.

 In the latest year 2011/12 dividends exceeded after tax profits, hence the red bit is shown as a negative.

This year 2012/13 is likely to see a similar pattern as 2011/12, with $15 million in dividends having been paid since 1st July 2012.

Dividends in the last 7 ½ years have totalled $130 million.

Industry watchers assess the value of Federal Hotel’s exclusive poker machine and Keno licenses as being worth $10 million per year. These are the ‘super profits’, equal to a market based annual fee that a licensee could afford to pay and still generate an acceptable  level of profits from the activity.

It appears that shareholders have been drawing out all gambling profits. The implicit undertaking at the time of the granting of the exclusive license was the windfall gain, the super profits, would be used for the benefit of the Tasmanian tourist industry with Federal Hotels the leader and everyone else hanging off its coattails.

The reality has been different. Federal Hotels has let the side down. Instead of evolving into a self reliant market leader it has slipped to become yet another too-big-to-fail handout dependent bully.

Employment is always used to justify the unjustifiable and at the Public Accounts hearing on 16th July 2003 into the exclusive licensing arrangements, Federal Hotels disclosed it employs “some 2,000 people”. The figure at  30th June 2012 was only 1,737.

It is about to become a lot lower.

With the rest of its business being highly leveraged following the acquisitions of Freycinet, Cradle Mountain, Henry Jones, the 9/11 operation, gambling dens at Ulverstone and Latrobe and the construction of the Palace of Versailles at Coles Bay, and given the voracious demands of shareholders, cash to spend on maintenance and capital upgrades, essential in any business but absolutely crucial in the tourism game, has become harder to find.

Something had to give.

The abandonment of the West Coast Wilderness Railway has been impeccably timed.

It is starting to appear as if the Tasmanian Forest Agreement Bill may pass the LegCo in which case more assistance to regional areas will become available.

The Australian Government has announced unofficially there won’t be any major changes to the GST rate and regime which the policy lazy States were hoping might assist them with more revenue possibly even remove some of the more inefficient and inequitable State taxes. Gambling taxes certainly falls into the latter category.

As a result we shall be stuck with the current level of gambling taxes particularly as poker reform is running out of steam and the State election is only a year away.

Federal Hotels are the sole agents collecting the State’s $60 million of taxes from pokies and Keno so they’re back in the box seat and can demand/negotiate additional concessions from Government.

One may disagree on the quantum of implicit windfall provided annually to Federal Hotels, but there can be no doubt that whatever the figure is it is de facto assistance to tourism.

However it has all been siphoned off by the shareholders. The rest of the industry, buoyed to some extent by the success of MONA, has been shafted by Federal Hotels.

Something had to give.

Looks like it's the turn of Tasmania’s taxpayers .


1 comment:

  1. Is it possible to show the return on equity for this business over the last 7 years, along with the payments to directors and executives. Were they making abnormal profits and paying very high salaries to directors and executives ?