THE DISTILLERY: A tale of two companies

A 'Tale of Two Companies' might be the name of our production this morning: The first is QBE, which is expected to reveal a big US acquisition, or so our jotters promise us, along with updates on flood and storm damage estimates and the 2010 preliminary results. Watch for the US deal, if it happens, to obscure what will be a lacklustre full year result. And the second is Tabcorp, which runs the opposition casino business to the stockmarket (only joking). It was the only major corporate in profit reporting mode yesterday and produced a modest result which got our cast of columnist saying nice things about a company that has been a consistent underperformer.

Stephen Bartholomeusz said on Business Spectator that Tabcorp had a rare trifecta in the December half: "The sound performance Tabcorp has reported for the first half means the proposed mid-year demerger of its wagering and casinos business remain solidly on track. Within the detail, moreover, there is some emerging sizzle to help sell the split. Across its major business streams – casinos, wagering and gaming – Tabcorp generated revenue and earnings increases. While they weren't spectacular increases, it has been a rare half where all three divisions are largely trouble free."

And The Australian's Tim Boreham thought Tabcorp produced a winner yesterday: "We challenge readers to find a blue-chip stock facing more variables – the Donald Rumsfeld known unknowns – than the gambling operator (Queensland-exposed insurers being a possible exception). After all, here's a business that doesn't know whether it will retain its key franchise – the Victorian wagering licence – or whether it will see the vaunted $600 million compensation from losing the pokies licence (which has already happened). There's yet to be a resolution on NSW race wagering fees (a levy to fund the gee gees), while there's broader regulatory reforms afoot on several fronts."

And Fairfax's Liz Knight saw a winner in the result as well: "The results for the first half of the financial year, published yesterday, provide but a glimmer of why Tabcorp is trying so hard to snare a bit of this VIP market from James Packer's Crown Casino. Revenue from VIPs rose 36 per cent in the six months to December, which was unexpectedly strong. Much of it would be due to the increased marketing of, and attention to, the casino business in recent times. The growth also came off a low base. The shorter-term strategy is to get Tabcorp back to its natural market share of 30 per cent or more." And the AFR said this morning: "Elmer Funke Kupper's brief at Tabcorp Holdings was never going to be easy: transform an unwieldy company with three strategic focuses into two clearly defined businesses that could be neatly demerged. But he's starting to win over the sceptics."

And The Australian's Matthew Stevens was another won over by the better odds at Tabcorp: "Tabcorp's boss yesterday affirmed that, various governments willing, the proposed demerger of his integrated gambling business into its key component parts of wagering and casinos is running to its mid-year schedule. And Funke Kupper, of course, looms as the highest-profile victim of his clever plan. The creation of CasinoCo and WageringCo, you see, will leave him unemployed. Funke Kupper asserted confidence in his timelines yesterday even though there is a good chance that his shareholders may be called on to approve a deal without clarity on whether Tabcorp has retained its exclusive hold on Victoria's wagering licence." Folks, hold your horses, the book is closed! 

John Durie in The Australian wrote: "QBE's Frank O'Halloran's reputation as a counter-cyclical investor will be underlined with the expected purchase of US-based mortgage insurer Balboa from Bank of America. QBE went into a trading halt this morning after Bloomberg first reported the talks, and by coincidence just as sentiment towards insurance companies changed in the wake of the Queensland cyclone and floods." And Chancticleer in the AFR wrote this morning: "When QBE Insurance chief executive Frank O'Halloran briefs the market this morning about the latest developments on the acquisitions front and the financial impact of the floods and cyclone Yasi, there won't be any surprises." And the paper also said: "The board of QBE Insurance Group was meeting on Thursday to discuss the multibillion-dollar financing of the purchase of Balboa Insurance Group, a unit of Bank of America."

But The Australian suggested that QBE won't be fund raising today, as some reports have claimed: "QBE Insurance chief executive Frank O'Halloran is not expected to go to the equity markets this morning when he unveils a $1 billion-odd deal to buy Bank of America's Balboa insurance division. The deal is likely to be structured in a way that will allow O'Halloran to cherry-pick the most valuable "lender-placed property insurance" asset from Balboa without QBE having to complete a full acquisition that would require a capital raising."

Bartholomeusz also wrote yesterday that "Alan Joyce has sounded an alarm about the position of Qantas' international business and by implication foreshadowed major changes to his group's network and strategies. In an address to the Melbourne Press Club today the Qantas chief executive made the point that while Qantas' twin-brand domestic business was very strong and profitable and there was a tremendous opportunity for the Jetstar brand in particular in Asia – Jetstar is the biggest low-cost carrier by revenue in the region already and is growing rapidly – Qantas International was, financially, falling 'significantly short' of where it should be. While he didn't say it, it is probable that the international business is losing money despite the rebound in international aviation last year."

The Australian's Tim Boreham wrote about Cyclone Yasi: "Bananas aside, business damage could have been worse. Miners seemed unaffected, although Mt Isa was battening down for the aftermath. Pure-play sugar producer Maryborough Sugar (MSF, $3.30) yesterday reported no damage to mills or plant "and normal crushing operations" were expected. Minnow Papyrus Australia (PPY, 12 cents), which makes paper and ply products from banana plant material, also dodged a bullet. Its factory is on the expansive Mt Uncle banana plantation near Walkamin, which had little damage, despite estimates that 85 per cent of the state's banana crop has been wiped out. Despite the widespread housing damage in places like Tully, insurers IAG (IAG, $3.75) and Suncorp (SUN, $8.45) enjoyed a relief rally yesterday."

Fairfax's Malcolm Maiden examined the NBN business plan filed over the holidays: "The underlying assumption is first that wireless-only premises grew quickly last decade because copper wire services did not offer a compelling alternative, in terms of bandwidth, speed and price. The second assumption is that the new network will enable retailers to offer that compelling alternative, on its fibre, or, in the bush, on its own wireless extensions. If that is right, Stephen Conroy will go down as the Father of Fibre to the Home. NBN Co will get 70 per cent of the market, and will book the revenue and profit it projects, making it easily floggable for $27.5 billion-plus from 2025 onwards. If the assumption is wrong, the 70 per cent market share target will not be met, NBN Co's earnings will fall short, and Conroy will have created a monster. My money's on the minister." Would he get a start at Tabcorp?

And finally, is this a case of 'deja vu all over again', to misquoute a former American baseball great? I refer to the odd situation at Kresta, the window blind company. The Australian's Bryan Frith is the latest jotter to attempt to get a handle on the situation: "Hunter Hall, a long-standing Kresta shareholder, has lost confidence in the board and has requisitioned a meeting to replace two of the three directors, the then-chairman Ian Trehar and Peter Hatfull, with its own candidates, Richard Taylor and John Molloy. Shareholders are due to vote on February 14. Trehar has countered by accusing Hunter Hall of seeking to control Kresta without making a takeover offer and has announced an off-market cash bid of 32.5 cents a share through Wildweb Enterprises, which is associated with Trehar, and 19.6 per cent shareholder Avatar Industries, another company associated with Trehar. Hunter Hall responds that it is a passive investor and has no interest in controlling Kresta. It is seeking board changes because it is dissatisfied with the performance of the company." Complicato. But wait, there's more, a long history of similar deals by some of the Kresta principals.