The Jumbo Interactive Ltd (ASX: JIN) share price could come under pressure on Tuesday following the release of an after-hours announcement by Tabcorp Holdings Limited (ASX: TAH) on Monday.
What was announced?
After the market close on Monday, Tabcorp revealed that it will be selling its stake in Jumbo.
According to the release, the gambling company has entered into an agreement to sell its 11.6% interest through a block trade with UBS.
Tabcorp has agreed to sell 7,234,178 shares in Jumbo at a price of $13.52 per share. This represents a 6.1% discount to its last close price and will generate gross proceeds of approximately $98 million. The sale is expected to settle on 24 September 2020.
After which, Tabcorp intends to use the proceeds to pay down its existing drawn bank debt facilities.
Why is Tabcorp selling Jumbo shares?
The company's Managing Director and CEO, David Attenborough, revealed that it was selling its stake due to its new long-term agreement with Jumbo. This meant that the strategic investment was no longer necessary.
Mr Attenborough explained: "Following the recent extension of our long-standing commercial distribution relationship with Jumbo for a ten year term to August 2030, there is no longer a strategic rationale for Tabcorp's shareholding in Jumbo."
'As a result, we have decided to monetise this investment, with the resulting capital to be used to further strengthen the balance sheet and support the move towards our recently revised target gearing range," he added.
Tabcorp will record a profit after tax on the sale of approximately $69 million. This is expected to be reported as a significant item in its first half results.
Should Jumbo shareholders be concerned?
Given that the two companies now have a ten-year agreement in place, I wouldn't be overly concerned by this news.
While Tabcorp is responsible for the vast majority of Jumbo's revenues at present, in ten years it should be a very different story.
This is due to management's bold international expansion plans for its Powered by Jumbo software as a service (SaaS) business. It notes that the global lottery market is worth US$303 billion a year, but just 7% of this market is online at the moment.
