Federal Hotels' predicament

Federal Hotels’ disappointing 2015 financials lodged last week with ASIC highlights its current predicament coinciding with the shock horror realisation that its exclusive gaming license may not continue into perpetuity under existing generous terms and conditions.

Net operating profit after tax was $20 million, down from $21 million in the previous year.

The profit soon disappeared with banks grabbing $9 million and shareholders $15 million.

Notwithstanding that Federal Hotels have $100 million worth of capital expenditure projects on the drawing board including redeveloping Wrest Point and Launceston Country Club casinos plus a new hotel at Port Arthur the shareholders appetite for dividends continued unabated, a craving that has seen $162 million vanish from company coffers in the past 10 years.

We now hear that Federal Hotels will put a handbrake on investment in Tasmania if it does not get certainty over a gaming license in the State.

Such a robust declaration of self interest conveniently ignores the fact that over the past 10 years Federal Hotels has claimed $251 million in depreciation deductions on plant equipment and buildings.

In other words $251 million of the cash surpluses generated by Federal Hotels’ operations has not been taxable.

Why should a privileged monopoly have an exclusive license extended when the Tax Act allows, and prudence dictates, that cash surpluses are, or should have been, available to fund the capital expenditure currently on the drawing board?

Quite apart from the inequity of a small group of Tasmanians, many suffering varying degrees of addiction, subsidising the operations of Federal Hotels, perpetuating an exclusive license acts to the detriment of competing accommodation providers.

If we are to be open for business, as the mantra goes, it should be a level playing field.

Federal Hotels were granted an exclusive license for nil consideration except for agreeing to spend $25 million on a 150 room resort now known as Saffire. The terms of the 2003 Deed governing the license were continually renegotiated to allow for delays and design changes, which prompted the Liberal Opposition via Leader Will Hodgman in 2008 to question the accountability and transparency of the Labor Government’s dealings with Federal Hotels.

Then Premier and Defender of the Faith, Paul Lennon came out swinging in typical style with the following, as recorded in Hansard on the 5^th March 2008.

“.... Federal Hotels and the Farrell family have been good friends of Tasmania for decades and it is disappointing ....that they now engage in what appears to be a sustained attack under parliamentary privilege.......Over the past five years Federal Hotels has spent $80 million investing in Tasmania. They plan to spend a further $80 million investing in Tasmania over the ensuing five years. This includes investments in Strahan Village, Lake Gordon cruises, the Lady Jane Franklin boat, the Wilderness Railway, the Cradle Mountain Chateau, Freycinet Lodge, Kooringa Cottages, the Comfort Inn at Port Arthur and the Henry Jones Art Hotel.”

Most of the investments listed are no longer owned by Federal Hotels. A search party is still looking for Kooringa Cottages. The Port Arthur development is on hold but everything else apart from the Henry Jones Art Hotel has been either surrendered or sold.

So much for the benefits of the exclusive license helping to grow the Tasmanian tourism industry.

Where did the $251 million of cash surpluses generated over the past 10 years by depreciation deductions go?

Apart from $32 million spent on the mandated Saffire property, net expenditure on new businesses and assets over the period has only been $190 million. The largest purchase was$40 million for the 9/11 chain of bottle shops and pubs. This was notably absent from Mr Lennon’s investment roll call. Subsequently in 2011 another $33 million was paid for two NW Coast pokie pubs.

This didn’t leave much to fund upgrades to capital hungry tourism venues which in Federal Hotels’ case were depreciating faster than the amounts spent on capital improvements.

In the last 4 years bank borrowings have been reduced by $60 million, further exacerbating cash flow difficulties.

Hence the need to extend the exclusive license.

Acquiring existing businesses is not investing in the strict sense. Overall tourism assets don’t increase with a change of ownership. In any event bottle shops and pokie pubs are not tourist magnets. They cater predominantly for locals.

The possibility that Federal Hotels will put a handbrake on further investments if the exclusive license is not extended has been described as blackmail by some commentators.

Federal Hotels’ financial statements however suggest that it’s not so much a threat as a reflection of reality. Federal Hotels still has borrowings of $140 million, but the lease commitments on poker machines are a further $45 million. Net operating cash is at the same level as it was 10 years ago, well below the 2008 peak, despite CPI increases of 25%. Without the MONA inspired boost to occupancy levels in Hobart, the location of the majority of Federal Hotels’ accommodation, it would be under even more pressure from banks to reduce borrowings, which it did thanks mainly to the sale of the regional businesses following the abandonment of its State-wide tourism strategy.

The business assets of the 3 regional businesses were bought by RACT, with an unknown landlord purchasing the real estate. Tourism in Tasmania is no longer beholden to Federal Hotels.

Tasmania is fortunate that the clubs’ lobby is nowhere near as powerful as in NSW for instance. Furthermore Federal Hotels own 11 of the Top 20 pokie pubs. Third party pubs and clubs only end up with 6% of the overall gaming pie. The government gets 24% and 70% remains with Federal Hotels.

Any reduction in pokie proceeds resulting from a revision of the exclusive license can be shared in the existing proportions. The community as a whole will be better off, more money will circulate instead of being diverted to buy existing bottle shops and pokie pubs and siphoned off by absentee shareholders.

An historic opportunity confronts Mr Hodgman, a chance to address the shortcomings of an arrangement he accurately pinpointed in 2008, a chance to move Tasmania on from another special deal for mates no longer needed to underpin the State’s economy and a chance to loosen the choke hold on addicted players.