Why is Woolworths continuing to fudge its pokies revenue numbers?

After two years of preparation, last week Australia’s biggest pokies operator Woolworths finally released the formal documents for its Endeavour Group demerger.

When the liquor and pubs demerger move was first announced in mid-2019, Woolworths CEO Brad Banducci got himself into all sorts of contortions trying to downplay the size of the enormous pokies business. He told ABC’s The Business that 7% or “a bit less than” $700 million of Endeavour Group’s total revenue was from poker machines, based on 2017-18 figures.

Banducci separately told investors his gaming unit was “about two-and-a-half times smaller than Crown and about half the size of Star”.

This led the ABC to report at the time that ALH — Woolworths’ hotels joint venture with billionaire pokies mogul Bruce Mathieson — “owns 12,000 gaming machine licences, making it the third biggest Australian pokies operator behind the casino businesses, Crown and Star”.

Truth be known, ALH, now part of the broader Endeavour Group, has more poker machines than Crown and Star combined.

Indeed the scheme book discloses that Endeavour Group has 12,363 poker machines at 293 venues across Australia, which is streets ahead of Crown’s 5057 machines across Melbourne and Perth and Star’s 4596 across its Sydney, Brisbane and Gold Coast casinos.

In 2018-19, the last full year before COVID hit, Crown happily disclosed that gamblers lost $462.7 million on its Melbourne pokies and $267.4 million at Crown Perth, for a total of $730.1 million.

In the same year, Star Entertainment revealed gamblers lost $347 million on its Sydney pokies and $335 million in Queensland, for a total of $682 million.

So if gamblers lost $1.41 billion on the 9653 pokies at the five casinos venues run by Crown and Star in 2018-19, what is the equivalent Woolworths figure from its 12,363 machines? Unfortunately they still won’t say, as the figures in the Endeavour Group demerger booklet continue to deduct state pokies taxes, when no other major operator in the gambling industry does this.

When Foster’s floated ALH in 2003 (a year before it was snapped up by Woolies and Mathieson) it gloated in the prospectus that the business owned 5875 pokies in 131 pubs and that gaming delivered 49% of its estimated $124 million in earnings.

However, even Foster’s refused to say how much gamblers were losing on its poker machines before ALH was spun off, and the ALH prospectus downplayed pokies revenue by netting off state taxes. ALH did at least disclose the size of these taxes, so you could deduce from the notes in ALH’s 2003 prospectus (see page 59) that total gambling revenue in 2002-03 was $540.4 million or 42% of total revenue, which came in at $1.28 billion.

Sure, Endeavour Group also comprises Australia’s biggest retail liquor business with a market share exceeding 50%, but it should be reporting its pokies revenue similarly to the way that its next biggest listed rival, Redcape Hotels, does.

On page 12 of Redcape’s 2018-19 annual report, pokies revenue of $179 million is disclosed. That comprises 62.8% of the $285 million in total revenue.

I’ve lodged a formal complaint with ASIC requesting that Woolworths be forced to disclose the equivalent figure for Endeavour Group before shareholders meet on June 18 to vote on the demerger. ASIC has confirmed it is looking at the issue.

According to page 27 of the demerger booklet, the 332 Woolworths hotels only produced total revenue of $1.7 billion before the pandemic hit in 2018-19, and $1.3 billion in 2019-20. This is clearly understated because pokies revenue alone would be at least $1.5 billion. Venue loss data revealed by the Victorian government shows that Woolworths takes almost $700 million a year from gamblers at it 80 Victorian pokies venues.

Woolies is clearly intending to continue to understate its pokies revenue by netting off state government taxes which average about 30% nationally. Historically the numbers were further reduced by backing out Mathieson’s 25% stake in the ALH joint venture. Mathieson owns 14.6% of Endeavour.

However, the demerger document doesn’t even disclose this accounting treatment, unlike what Foster’s did when it floated ALH back in 2003.

Asked to disclose the total gambling revenue figure, Woolworths said: “The treatment of gaming revenue and associated taxes is in accordance with accounting standards which require that revenue is reported net of any taxes collected on behalf of a third party. As a stand-alone entity, Endeavour Group will consider opportunities to provide further disclosure.”

You would think super funds that take ESG issues seriously would want to know exactly what level of social harm they are getting into holding Endeavour shares. Pokies revenue, EBITDA and earnings margin should all be disclosed.

If the Woolworths board won’t disclose this information, it’s over to ASIC.