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October Investor Forum: Shareholder value in ESG investing

Sportech (SPO) has announced plans to return £36m surplus cash to shareholders by way of a tender offer, at 40p for up to 47% of the issued share capital. Assuming the offer is all taken up, SPO will be left with 100m shares outstanding. The deal requires court approval to create the necessary distributable reserves. SPO also announced that it was in discussions to sell its terrestrial lottery business for ca.$14m. The potential upside from the newly agreed sports betting deal in Connecticut (CT) remains uncertain but could be significant. We see a range of values from 39p to 46p per share prior to the tender offer.

  • Tender offer: Following various disposals, the company was sitting on substantial surplus cash. It is negotiating to sell its terrestrial lottery business in the Dominican Republic for between $14m and $15m. The venues in CT, the online lottery business and an online pari-mutuel sports betting business will remain.
  • Venues in CT: The big unknown is what happens in CT. SPO revealed that it had agreed a 10-year deal with the CT Lottery Corp. (CLC) to deliver sports betting in its venues and promote CLC’s online and mobile channel. We don’t know how profitable this will be, but it will certainly be a fillip to the venues business .
  • Valuation: An owner of 100 shares thus has 47 shares worth 40p each plus 53 shares worth an estimated 41p to 54p each. Overall, therefore, we estimate the value of SPO’s shares to be between 39.3p and 45.9p. The uncertainty around the lottery disposal should be removed by the end of September.
  • Risks: There is a risk that the lottery disposal fails to complete, and there is also a very clear risk that the outcome of the CT gaming process is below our lower-end expectations. Once the cash is returned, SPO’s equity will be substantially smaller, rendering the shares less liquid.
  • Investment summary: SPO is a much-slimmed-down business than the one we first wrote about last November. The remaining venues business should bounce back into profitability in its slimmed-down form. The upside is unknowable and depends on how sports betting pans out in CT, but it could provide significant upside. Plus, there are the two online businesses: a risk-free pari-mutuel online sports gaming business and the online lottery business worth, maybe, £3m.
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