10 reasons to float the Tote; Viewpoint Following the government's decision to reject racing's pounds 320m bid for the Tote, financial expert and racing fan Jonny Allison believes the best way forward is to offer the company on the stock market.

Byline: Jonny Allison

THE debacle that has become the proposed sale of the Tote has heightened concerns that racing will ultimately lose out when the process is completed.

The extent of the dithering and delaying that has brought us to the current impasse is too depressing to chronicle. The crucial question is what can be done to resolve things now in a way that meets the needs of the government and protects racing's interests.

It seems to me that rather than pursue a sale, the government should be considering floating the business. With the number of interested parties involved, an Initial Public Offering (IPO) of the Tote may be the most appealing option for the following ten reasons:

1 De facto the price is determined by the market so there would be no more arguments about securing a fair return for the taxpayer, contravening EU state aid rules etc. The price is likely to be less than an in-market acquirer could pay up-front as there are no synergies. But given the government's promises to racing, how can the business be broken up and/or sold to a competing bookmaker?

If the government retained a share in the listed entity, the taxpayer could still benefit from increased value as the business grows and an increased dividend is paid. There are numerous precedents across Europe for governments retaining a shareholding in listed entities. If the shops are worth significantly more in someone else's hands, the Tote would still be free to assess whether to selectively sell certain shops as it wished going forward and generate more capital to return to shareholders or reinvest in building the pool franchise.

2 Government can give 'racing' shares directly, which is less clumsy than trying to get the sport to compete on price. This would still keep the government at least partially honest to its promise and 'racing' would benefit from the ongoing growth of the business through dividends that could be reinvested in building the underlying racing product. The percentage of shares given to 'racing' would depend on how much racing received from the proceeds raised by the government selling their holding to new investors on an IPO.

3 The government could put in place the same protections that the former building societies, such as Halifax and Abbey National, had when they floated and became banks, ie that it would not be possible for the Tote to be acquired other than on a recommended basis for five years, which stops one of the major firms just coming in and taking it out straightaway. A government shareholding would also give some protection. This gives the Tote the chance to flourish as an independently listed company.

4 An IPO would allow the Tote to compete on a level playing field with other bookmakers in terms of access to capital markets and ability to use equity as a tradeable currency.

5 Floating the Tote would allow new non-competing institutional investors to subscribe to shares which could help create global tote pools - for example, a group that runs one of the totes in the Far East might buy a small shareholding and build a co-operation that could give access to a much larger pool. This would unlock significant value in the Tote franchise and could also address the issue of the seven-year exclusive pool licence through partnerships/crossshareholdings creating pools with liquidity that no competitor could match when the seven years is up. One day, the logical thing may be for some of the different Tote operators to merge like some different Stock Exchanges have in order to get the systems cost/infrastructure benefits and huge pool liquidity.

6 The publicity that a privatisation gives can be great for a business. It really feels like a new beginning, and will generate publicity outside the world of racing. In addition, you can directly incentivise staff through equity ownership to help drive the business forward and also attract additional managerial talent.

7 Tote account holders could be given the chance to subscribe for shares at a discount to the new investor offering, which obviously could help reward loyalty (I admit I am a Tote Credit account holder). The IPO also provides the option for completely new retail investors to subscribe for shares in a retail offering in addition to institutional investors who will meet the majority of the demand for new investment.

8 An IPO avoids the group being saddled by debt under a private equity option which i) could restrict the Tote's flexibility to consider strategic opportunities in the coming two to three years when the gambling landscape could change dramatically and ii) only delays the issue as the private equity firm will need to realise their investment for their own investors in a few years by selling or floating the business. Why give them the upside rather than allow retail customers as well as 'racing' (whatever that may be), a broad spread of institutional investors and the government itself to get the benefits of the group's development in the next few years? Further, that debt will be expensive and difficult to secure in current markets, which should mean a reduction in the price offered by a private equity buyer.

9 It should be possible to structure who receives what percentage of the IPO proceeds. The taxpayer will need to get a sizeable percentage, depending on what stake they retain in the business in the future, and the same for 'racing'. In addition some (or none) could go to a racing trust, which can use the proceeds to help fund good causes (when the Royal National Pension Fund for Nurses was sold years ago a significant amount went to a charitable trust which had an independent board that oversaw the investment of the money). This is no different to the National Lottery board deciding who should get funding. Alternatively, some of the proceeds could go to charities like the ILPH or GamCare or whatever.

10 Both Hills and Ladbrokes suffered fairly significant falls in their share price in the second half of last year, but they are recovering. Whichever private equity group buys into the sector will point to their current earnings multiples and use them as a base. However, in an IPO the upside for future recovery is widely spread among investors, including retail, as opposed to a private equity house taking 100 per cent. Equity markets are currently unpredictable but there will need to be time to structure the IPO, and an IPO could be up to 12 months away. In the meantime, staff will be driven to get the business ready to prosper as an independent listed company rather than be in this very unsatisfactory limbo.

The government has it within its powers to deliver an IPO.

There is an opportunity here to create something of a life-changing experience for the Tote and for racing as a whole, just at a time when racing needs promoting more than ever. Racing lost its chance to grip betting revenue through government indecisiveness during the early 20th century. It would be a disaster for racing if that were allowed to happen again at this stage in the 21st. Float the Tote!

Jonny Allison, a lifelong racing enthusiast, is an investment banker who specialises in mergers and acquisitions. He has been involved in a number of IPOs. He was also the winner of the Racing Post's Select a Stable competition for Royal Ascot. Although he works for a City firm, he stresses his opinions are personal views and not those of the firm