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Why the Tatts Group Ltd share price is sinking today

poker machines

Tatts Group Ltd (ASX: TTS) has seen its share price fall more than 7% today, after the gaming and lotteries business lost a court case it was expected to win.

The High Court of Australia today upheld the State of Victoria’s appeal against Tatts and now the company must repay the state $540 million plus interest from June 2014. The amount of interest is yet to be determined.

Tatts says it also has to pay the State’s costs of the appeal as well as the cost of proceedings in the Victorian Supreme Court and Victorian Court of Appeal.

The company says the $540 million, which was received in June 2014, has been treated as unearned income and a current liability and has not been included as income in the financial accounts.

Tatts says the proceeds were used to repay debt as it matured, resulting in an approximate $18.6 million after tax benefit since 2014. The impact on the company in the 2016 financial accounts will be the payment to the state of the additional interest plus legal reimbursements.

So what?

Despite the significant amount, it’s unlikely to result in much in the way of a financial impact on Tatts. Had the result gone the other way and Tatts won (which was expected), it’s likely the company would have recorded the amount as a one-off gain.

As the company also notes in its announcement today, the decision doesn’t materially affect its net debt to EBITDA ratio, nor does Tatts expect it to affect its high annual dividend payout ratio.

Now what for Tatts group?

Despite the share price fall today, its business as usual for Tatts, which reported a 6.2% increase in underlying half year net profit of $147.9 million. However, despite the company’s declaration that the court decision wouldn’t affect its debt ratio, the company is still going to have to pay out $540 million plus costs – which will likely be funded by debt, and will see net debt hit roughly $1 billion.

Foolish takeaway

There’s no doubt that losing the case will have a negative impact on Tatts Group. The market has market down the company’s value by around $370 million, suggesting today’s share price fall is fairly on the money, but could have fallen even further.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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