Tabcorp CEO Funke Kupper turns to casinos for growth

“We have underinvested significantly in our casinos over many, many years,” Chief Executive Officer Elmer Funke Kupper said in an interview in Melbourne. “By the time we get to 2012, casinos will be a much larger part of our earnings.”

The budget for Star City’s makeover was yesterday increased 17 % to us$ 482 million as Tabcorp adds restaurants and more gambling areas to the only casino in Australia’s most-populous city.
New laws in Victoria state will see the nation’s biggest gambling company lose its slot license, source of more than a quarter of earnings, as betting shops battle competition from Internet-based bookmakers.

“They’re pushing the casinos business harder because it is the only division not facing those hurdles,” said William Seddon, an analyst who helps manage $250 million with White Funds Management in Sydney. “If they can deliver on this strategy I think there is a fair degree of upside potential.”

Tabcorp shares rose 8 cents at the 4:10 p.m. market close in Sydney and have gained 1.7 % this year. Australian benchmark S&P/ASX 200 Index has climbed 15 percent in 2009.

The casinos unit, which includes Star City and three venues in Queensland, contributed about 38 % of Tabcorp’s pretax earnings in the 12 months ended June, the company said yesterday. Wagering accounts for 32 % and slot machines represent the rest.

While located in Australia’s largest city, Star City isn’t the country’s most profitable casino. The venue had annual earnings before interest, tax deprecation and amortization of about us$ 193.5 million, almost half that of Crown Ltd.’s Melbourne venue, according to analysts at Macquarie Group Ltd.

“On balance, it would seem logical that Star City should be able to significantly lift its earnings,” Macquarie analysts led by Alex Pollak said in a report to clients today. “Crown is making us$ 382.8 million in a city 30 % smaller.”

Star City’s expansion is the biggest spending program the company has made at the venue since acquiring it in 1999 for us$ 1.4 billion. Since taking on the CEO’s role two years ago, Funke Kupper has replaced management of the casinos division and extended the exclusive period for Star City until at least 2019.

He hired Larry Mullin and two other executives from the Borgata Hotel Casino & Spa, the most profitable gambling house in Atlantic City, as Tabcorp seeks to run more of the restaurants and bars at Star City instead of leasing them to other operators.

Mullin joined in February to head the casinos division while Victor Tiffany, who helped develop Robert de Niro’s Tribeca Grill, Nobu in London and the Hard Rock Hotel in San Diego, started as Star City’s head of hospitality two months ago. Sid Vaikunta started this month as general manager of strategy and marketing.

“Victor’s got real experience in designing, developing and working those restaurants,” Funke Kupper said in the interview. “He’s a real expert in terms of understanding the offer to consumers, what good performance looks like and what bad performance looks like.”

Tabcorp, with off-track betting shop monopolies in Australia’s two most-populous states, is facing higher costs in its wagering division as it has to increase payments to horse racing clubs as a condition of its license.

Internet-based corporate bookmakers and betting exchanges such as Betfair don’t have to pay the fees. Tabcorp has established its own online service, Luxbet, to stem market share losses. The company’s exclusive betting shop permit in Victoria expires in 2012, the same year it loses its slot-machine duopoly with Tatts Group Ltd. The government is scheduled to announce the new licensing rules later this year, Funke Kupper said.