shake up as Jumbo founder sells down

In August 2021, Tabcorp (ASX: TAH) and Jumbo Interactive (ASX: JIN) formalised a long-term extension of their reseller agreement which would enable Jumbo to continue selling lottery tickets online through their OzLotteries platform. Following on from that, Jumbo reported almost 200k new active customers which took their total to 836k with business appearing to be booming. 

Despite this perceived success, the market was surprised to see Jumbo CEO and Founder Mike Veverka sell down a portion of his stake in the Company, right before a massive shake up in the Australian lotteries industry. 

The shakeup is set to be driven by Tabcorp, the critical partner in Jumbo’s lottery ticket sales, which has licenced Jumbo the rights to sell online tickets to lottery draws like Powerball and Oz Lotto. 

With much of the younger generation hopping onto their weekly Powerball to punt their lucky numbers, the lottery and keno division within Tabcorp has been the primary profit-driver despite the company being better known for their racing and sports wagering business. Given the continued losses incurred by their wagering division, Tabcorp powerbrokers finally decided enough was enough and in 2021 confirmed that Tabcorp would de-merge its hugely profitable lotteries business, protecting profits from being cannibalised by the loss-making wagering division. 

Putting this in perspective, for the half year ended 31 December 2021, the lotteries division reported $305m EBIT from $1,784m revenue while the wagering division logged a lowly $43m from $1,073m revenue. This has become a recurring situation for Tabcorp each reporting period in recent years with the Company failing to adapt to the digital transformation of its customers. 

With Tabcorp’s demerger set to be implemented by June 2022, their lottery and keno business will be named ‘The Lottery Corporation’. The cost of the demerger is expected to be up to $275m, with an ongoing incremental cost of $40-$45m per annum. It will however enable The Lottery Corporation to focus solely on selling lottery tickets. Included in this will be work on their The Lott app which is a direct competitor to Jumbo’s OzLotteries app which has a larger customer base. Growth of The Lott would enable The Lottery Corporation to retain margins sold on ticket sales where tickets purchased online are priced higher than in-store tickets at your local newsagency. 

For keen onlookers, this was foreshadowed in September 2020 when Tabcorp confirmed it had sold off its entire 11.1% equity stake in Jumbo, of which Tabcorp was its third largest shareholder at the time. The selldown by Veverka only adds further light behind the path Australia’s lottery industry is heading. 

With the digital lottery industry showing no signs of slowing down, Jumbo has wasted no time expanding new segments internationally – SaaS and Managed services – which can leverage into new markets in the UK, Canada and the United States.

Following their acquisition of Stride Management Inc. in Canada and the successful acquisition of Gatherwell Limited in the UK, Jumbo has given a strong foothold in key international markets, limiting its dependency on Australia. 

The managed service segment is expected to grow significantly as both the Canadian and the UK markets can dramatically benefit from Jumbo’s digital assistance. A vast majority of charities and worthwhile causes worldwide do not have a lottery program, making this division an essential element of Jumbo’s growth strategy. 

Veverka said, “I remain fully committed to leading Jumbo through the exciting future ahead. The global lottery industry continues to grow, underpinned by the ongoing structural shift to digital and Jumbo is uniquely placed to help our lottery partners and clients through this change by providing our best-in-class lottery software and our continuously improving player experience.” 

Following the sale of 1.1% of his shares, Mr Veverka will continue to remain as one of the Company’s shareholders, holding equivalent to 14.1% of total capital issued.

Being one of the largest shareholders, the impending shake up of Australia’s lotteries division could spell trouble for Jumbo who will have the rights to continue selling online tickets, but don’t be surprised if you see a big marketing push for customers to switch to The Lott after Tabcorp’s demerger is finalised.