Rees dreaming of a truckload of lottery cash

This situation is all the more frustrating for the State Government because the $90 million jackpot drawn last night has raised an additional $80 million in revenue and the Government has pocketed an added $20 million in royalties.

It will have the effect of increasing the earnings of NSW Lotteries by more than 10 per cent in the financial year that finished yesterday.

These are just the kind of profit upgrades needed to maximise the price that NSW Lotteries will fetch in the market.

There is a flow-on marketing effect, too. Large bonus pools bring in new punters who otherwise don't regularly feature in this market.

(I, for example, bought my first lottery ticket this week even though I recognised that the odds of winning were ridiculously low.)

The NSW Opposition has refused to vote in favour of the lotteries privatisation based on its belief that in a better equity and debt market environment the proceeds from the sale would be greater, but there is probably a stronger argument to suggest that the sale is now financially ripe.

The public's response to the $90 million jackpot is further evidence of this. Its a counter-cyclical investment when the economy is sluggish and the community is fearful about jobs, taking a small punt on a wildly lucrative outcome is an understandable behavioural response.

Lottery tickets are the ultimate micro-spends the supreme aspirational item. Last year and this year revenue from this business will have increased by 8 per cent and 7 per cent respectively.

This may not seem like much, but in these kinds of businesses this is unusually high. Generally lotteries businesses tend to grow in line with or even below inflation. They produce income more akin to an annuity stream than a growth business.

But in these harsher economic times their growth profile is steeper.

The other factor that works in favour of a near-term sale of NSW Lotteries is that there are a couple of particularly eager (read desperate) participants in the gambling industry who have lost or could potentially lose large government gambling and wagering licences in Victoria. Tabcorp and Tatts will fall into an earnings ditch in 2012 when their Victorian gambling licences expire.

Tabcorp's wagering licence also comes up for renewal from 2012, which gives it an even greater exposure to lost revenue.

Investors in both companies want to know how these earnings can be at least partially replaced. And they want this information this year, not next year, when the general financial environment may (or may not) be more favourable.

There will be plenty of competitive friction between these two large companies for the NSW Lotteries business. In 2007 Tatts paid $530 million for Queensland's Golden Casket Lottery, and adding NSW to its lotteries inventory would make a lot of sense.

Many other factors will determine the value of NSW Lotteries, not the least of which is the length of the licence and the period of exclusivity. Buyers will also be taking into account the fact that the past two years of better than long-term average revenue increase are aberrant.

But if the Government factors into the sale contract the ability to deliver on new product and is careful to protect the newsagent distribution system, the new enhanced revenue numbers could be maintained.

Millions of Australians are hoping that the tyres will be blown out on the truckload of cash as it passes by their doorstep. Nathan Rees will also be hoping that some time soon an even bigger $600 million truckload of cash will make its way to the state's coffers.

But the blokes holding a gun to his head don't want some of the cash they just want to take potshots at the fauna in the national parks.